TRADERS SELL THE SOX BUT ARE BUYING DRUGS -- NASDAQ 100 HAS SECOND LOSING DAY ON RISING VOLUME -- DOW FAILS FIRST TEST OF 12000 LEVEL
DRUGS REACH NEW FOUR-YEAR HIGH ... Drug stocks were the day's strongest market group today. That's coming at a very good time for this formerly neglected group. The weekly bars in Chart 1 show the AMEX Pharmaceutical Index (DRG) breaking through its early 2004 peak to reach a new five-year high. The solid blue line on Chart 1 is the relative strength ratio of the DRG divided by the S&P 500. The falling line from 2002 to the end of 2005 shows how badly the group underperformed the rest of the market. The RS line, however, has been rising during 2006 as money has started to move into this neglected group. That suggests that the group is undervalued relative to the rest of the market and is starting to gain some upside momentum. The easiest way to buy the group is through the Pharm Holders (PPH). Chart 2 shows the PPH moving up to challenge its highs formed during 2003 and 2004. Johnson & Johnson is the group leader. Chart 3 shows JNJ hitting a new record high today. Three of the top stocks in the Dow today were drugs -- JNJ, Merck and Pfizer.
Chart 1
Chart 2
Chart 3
THE CHIPS ARE FALLING... Semiconductors had another bad day. After failing a test of its 200-day line yesterday, the Semiconductor (SOX) Index is now bearing down on its 50-day moving average (Chart 4). That had a negative impact on the Semiconductor Holders (SMH). Chart 5 shows the chip ETF falling back below its 200-day line to negative last week's upside breakout. The fact that it's falling on heavier volume is a negative sign. Although most chip stocks fell today, the worst performance belonged to Linear Technology (Chart 6). LLTC was also one of the biggest percentage losers in the Nasdaq 100.
Chart 4
Chart 5
Chart 6
NASDAQ 100 FALLS IN HEAVIER TRADING ... I've been expressing some short-term concerns about an overbought Nasdaq market that is up against resistance at its spring high. I've also suggested that any market pullback that materializes will probably start there. Although most blue chip averages closed up today (although off their highs), the Nasdaq lost more ground. Chart 7 shows the Nasdaq 100 Shares (QQQQ) falling for the second day in a row on rising volume. That suggests that short-term momentum in the technology sector may be shifting to the downside. The lines surrounding the QQQQ are Bollinger bands. The dashed 20-day average has acted as supported during recent pullbacks. That makes it the first line of support beneath the Nasdaq 100 (see arrow). As long as the Nasdaq is correcting, it's doubtful that the Dow will be able to stay above 12,000.
Chart 7
DOW CLOSES BACK BELOW 12K... I don't assign a lot of importance to the Dow 12,000 level. But it is attracting enormous media coverage and, therefore, has to be viewed as a potential "psychological" resistance level. In other words, it's a level that might tempt institutional traders to take some short-term profits. As I've suggested already, I believe the short-term key to the Dow rests with the Nasdaq market. I doubt that the Dow can stay over 12K as long as the Nasdaq continues to erode. If and when the Nasdaq resumes its uptrend (and especially if it breaks its spring high), the odds of the Dow exceeding the 12000 level would increase accordingly. The 5-minute price bars in Chart 8 show the Dow's battle with the 12,000 level today. It seems clear that today's early move over that level prompted some selling.
Chart 8
