BIG DROP IN OIL HELPS MARKET RALLY -- COMMODITIES CONTINUE TO SOFTEN -- HEALTHCARE ETF NEARS RECORD HIGH

HURRICANE MISSES GULF COAST... News that a hurricane threat to oil refineries in the Gulf of Mexico had passed caused heavy selling in the energy pits today and took most other commodity markets lower as well. Crude oil prices fell more than $2.00. Chart 1 shows the nearby futures contract for crude oil bearing down on the $70 level and a possible test of its summer lows. Gold and silver prices fell as did most other commodities. The Reuters/Jefferies CRB Index lost 6.57 points to close at 329.69. Chart 2 shows the CRB threatening its June low at 329.61. That's an important test. A series of closes below that support point would complete a topping pattern that began with the May peak at 366. Today's CRB drop caused selling in most commodity-related stocks including energy, precious metals, and basic materials.

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SELLING IN THE OIL PATCH... Chart 2 shows the Energy Select SPDR (XLE) in a precarious chart position. Its early August rally fell short of its April/May peak which is often the first sign of a tired market. The daily MACD lines are in negative territory. The XLE may be nearing a challenge of its 50-day moving average (blue line). A close beneath that line (or its mid-August low at 55.86) would justify some profit-taking. Chart 3 shows a much weaker chart for the Oil Service Holders (OIH). The OIH peaked at the start of May and has been falling since then -- on both an absolute and relative basis (see falling RS line). The OIH is also trading below its 200-day moving average. It's hard to tell at this point which of the two energy ETFs is giving us the true picture. At the moment, both are on the defensive. Today's energy selling helped spark a bounce in the rest of the market.

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DOW AND S&P EXTEND RALLY... The next two charts show the Dow Diamonds (DIA) and the S&P 500 SPDRs (SPY) extending their rally even further and moving closer to their May highs. One negative factor has been the absence of volume. That may be largely due to traditionally slower August trading. But it's still a negative. The 9-day RSI line in Chart 6 shows the SPY moving into overbought territory over 80. That's also some cause for concern. Today's rally, however, gives us a new short-term support level to work with. For the DIA, that's last week's intra-day low at 112.58. For the SPY, it's the same low point at 129.19. Those following the short-term trend higher with tight trailing sell stops might want to keep those two numbers in mind. Interestingly, most of the upside leadership is still coming from traditionally defensive groups like consumer staples, REITS, utilities, and healthcare. In fact, the latter group is close to a new record high.

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HEALTH CARE SPDR NEARS OLD HIGH... After several years in investor doldrums, the healthcare group has come back into favor as shown by the rising Health Care SPDR (XLV) in Chart 7. That started in early May when the rest of the market started to weaken. Part of the reason for that is because healthcare stocks are generally considered defensive in nature. The XLV/SPX ratio bottomed in May (blue arrow) and continues to rise. "Relative" strength isn't enough however. We also like to see "absolute" strength. And we've certainly seen that. Since early May, the XLV has gained 7% in a generally flat market. And it may get even better. Chart 7 shows the XLV nearing a challenge of its early 2006 peaks. Needless to say, a close over that important resistance barrier would a strong chart sign. Chart 8 puts the recent healthcare uptrend in better perspective. It shows the healthcare ETF nearing a new record high. Even more significant is the recent upturn in the XLV/SPX relative strength ratio (blue line) which is the strongest since the end of 2006 when the stock market bottomed. The last major upturn in the RS line took place during 2000 when the stock market was peaking. The message there is that investors appear to be turning back to healthcare stocks on fears that the economy is slowing and that the stock market doesn't have a lot of upside potential. Most of the buying interest in the healthcare sector has been in pharmaceutical stocks which are staging an impressive comeback of their own.

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PHARM HOLDERS AT TWO-YEAR HIGH... Chart 9 shows the Pharm Holders (PPH) trading at a new two-year high. Its relative strength line (green line), which turned up in May, is trading at a new 52-week high. People have to use pharmaceuticals (and healthcare services) in good and bad times. That makes them a much safer bet in an uncertain economic environment and an aged bull market. The monthly bars in Chart 10 show the Pharm Holders heading toward their early 2004 peak over 81. The green RS line has broken a three-year down trendline (up arrow). That means that big pharmas are doing better than the S&P 500 for the first time since the bull market in stocks began. That's may a vote of confidence in the former, but not necessarily in the latter.

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