BIOTECHS AND TECHS GIVE NASDAQ NEW SIGNS OF UPSIDE LEADERSHIP -- GENENTECH, MICROSOFT, AND YAHOO HAVE GOOD CHART DAYS -- NASDAQ HITS NEW SIX-YEAR HIGH -- EMERGING MARKETS STABILIZE -- THE VIX FALLS
NEW NASDAQ LEADERSHIP ... The first part of the headline posted above is the same one I used last Thursday. At the time the Nasdaq Composite Index had bounced impressively off its 50-day moving average. And its relative strength line (versus the S&P 500) had turned up for the first time in six weeks. Chart 1 shows the Nasdaq Composite Index breaking out of its two-month trading range today to the highest level in six years. The big technology stocks leading the Nasdaq higher over the last week include Internet, networkers, semiconductors, and software. Networkers broke out last week. Chart 2 shows the Internet Index (IIX) matching today's Nasdaq breakout. Chart 3 shows the Nasdaq 100 Shares (QQQQ) hitting a new high on rising volume. Once again, upside leadership by the Nasdaq has helped support the rest of the market and is largely responsible for today's rally.
Chart 1
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MICROSOFT AND YAHOO HAVE GOOD CHART DAYS ... Big techs contributing the most to this week's technology surge are Apple, Cisco, Intel, Google, Microsoft, and Yahoo. The last two mentioned are the most notable today. The daily bars in Chart 4 show Microsoft hitting a new high today (after bouncing off its 50-day line yesterday). The monthly bars in Chart 5 show that MSFT broke out to a new four-year high in late 2006. Its relative strength line (solid line) shows that Microsoft is exerting Nasdaq leadership for the first time in more than four years. [That's boosting the software group]. Yahoo is also having a good chart day. Chart 7 shows the internet stock trading over its 200-day moving average for the first time in a year. While big techs are the driving force behind the Nasdaq breakout, biotechs are helping.
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DNA LEADS BIOTECH HOLDERS IN UPSIDE BREAKOUT ... Last Thursday I showed the Biotech Holders (BBH) as it was breaking through its 50-day moving averge to the upside. It's done much better since then. Chart 7 shows the BBH surging 2% today to the highest level in a year. That makes biotech one of the day's strongest market groups. Last week's biotech leaders were Amgen and Genzyme. Although both are continuing to rise, today's biotech star is Genentech. Chart 8 shows the big biotech stock jumping 4% (on very heavy volume). The stock is breaking through its late 2006 peaks as well.
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Chart 8
EMERGING MARKETS STABILIZE ... Another factor supporting the stock market is stability in emerging markets. The sharp drop in commodity prices (and the threat of nationalization of certain industries in Venezuela) caused some nervous selling in emerging markets over the last week. In today's trading, however, most emerging markets are rebounding (led by China). Chart 9 shows the Emerging Market iShares (EEM) bouncing off their 50-day moving average. If that line holds, that will relieve some short-term market pressures. Chart 10 shows the Latin America iShares (ILF) bouncing off its 50-day line as well. That's no guarantee that emerging markets are totally out of danger. But it is encouraging. New buying of basic material stocks that started with Alcoa yesterday is also helping to stabilize the market. Chart 11 shows the Materials SPDR (XLB) reclaiming its 50-day line today. So has the S&P 600 Small Cap Index (Chart 12). That relieves the short-term damage done last week in those two groups.
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VIX TUMBLE IS A GOOD SIGN ... Another short-term positive for the market is today's plunge in the CBOE Volatility (VIX) Index. Earlier in the week, I showed it testing overhead resistance near its 200-day moving average. It's now fallen back below its 50-day line. That confirms that the danger of a market downturn has been averted for the time being. That's because the VIX usually trend in the opposite direction of the market. One of our readers questioned the value of using the VIX as a market indicator. As proof of that, he claimed that the April and October 2005 market rallies began with a rising VIX Index. I beg to differ. Chart 14 shows that the VIX (red line) and the S&P 500 (green line) traded in opposite directions throughout 2005. It also shows that the two bottoms in April and October (green arrows) accompanied peaks in the VIX (red arrows). Both 2005 market corrections prior to those market bottoms occurred while the VIX was rising. I agree with the reader that the VIX is mainly a coincident indicator. But its signals do a pretty good job of indentifying market turns. This week's failed rally in the VIX (and the accompaning market rally) is a good example of that.
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AIRLINES CONTINUE TO CLIMB ON OIL DROP... One sector's pain is another's pleasure. Nowhere is that more evident than in the airline group. Rising oil prices over the past few years helped make airlines one of the market's weakest sectors. The recent plunge in oil, however, has helped turn things around for the airlines (in addition to expectations of industry consolidation). Airlines continued their rapid ascent today. A 3% advance boosted the Airline Index (XAL) to a new three-year high as shown in Chart 15. Of equal importance is the upside breakout in the XAL/S&P 500 ratio to a new two-year high.
Chart 15
2007 SECTOR ROTATIONS ... The big drop in oil stocks (and most stocks tied to commodities) has pushed money into other sectors. The top sector gainers are technology, consumer discretionary, consumer staples, and healthcare. Industry leaders are airlines, brokers, semiconductors, retailers, and biotechs. Today's new high in the Broker/Dealer Index is market positive. Utilities are being hurt by rising interest rates and falling energy prices. While heavy selling in basic materials and energy stocks weighed on the NYSE and the S&P 500 indexes early in the new year, the Nasdaq benefited from lack of exposure to those groups. New Nasdaq leadership is helping to extend the market's uptrend.
