TELECOM LEADERSHIP CONTINUES AS VERIZON ACHIEVES BULLISH BREAKOUT -- RISING RATES FUND IS RISING WITH BOND YIELDS -- NATURAL GAS STOCKS LEAD ENERGY SECTOR HIGH -- APACHE CORP IS BREAKING OUT

TELECOM LEADERSHIP CONTINUES... I wrote a positive article on the telecom group on June 19 of last year with headlines like "AT&T Leads Telecom Group Higher" and "Telecom Holders Are Having a Good Year". Chart 1 is an updated version of a chart I showed in the middle of last year. At the time, the Telecom Holders (red line) were just breaking out to a new four-year high (red circle). The group's relative strength ratio (blue line) had turned up in 2006 for the first time in six years (blue arrow). I referred to it then as a "new phenomenon" and attributed the new interest in telecom as a sign that investors were rotating back to large cap stocks. Today's 52-week high by the TTH shows telecom leadership continuing. A large part of the revival is due to the strong action in AT&T, which is the largest fund holding. Chart 2 shows AT&T rising 50% since last summer when it was just turning up. Its relative strength ratio has been keeping pace. My main interest today, however, is with the second biggest holding.

Chart 1

Chart 2

VERIZON IS BREAKING OUT ... The monthly bars in Chart 3 show Verizon Communications trading over 37.5 for the first time in five years. In so doing, it has broken throught the previous peaks hit in late 2004 (36.69) and early 2003 at 37.32. The stock has been in a bottoming formation since the middle of 2002. This month's upside action has the look of a major bullish breakout. Notice also that the stock's relative strength line is hitting a new yearly high. The RS line broke a resistance line last summer (blue arrow) and has been rising since then. The point & figure boxes in Chart 4 also show the upside breakout. An initial buy signal was given last July at 33. This month's rise to 38 (the red number 1 stands for January) is an even more impressive buy signal.

Chart 3

Chart 4

RISING RATE FUND IS RISING ... As I was re-reading my June article on telecom, I ran across a second story on the ProFunds Rising Rates 10 Fund (RTPIX). This seems like a good time to revisit that fund as well. Last week I showed the 10-year T-note yield rising to a new five-month high. I mentioned that rising bond yields were bearish for bond prices. That's because bond prices fall when bond yields rise. One way to get around the problem of rising rates is to buy a "rising rates" fund. Chart 5 shows the RTPIX (through Monday). After bottoming during December, it's risen to a new six-month high. The RTPIX is designed to profit from a rising 10-year T-note yield (hence the 10 in its name). Chart 6 shows the ProFunds Rising Rates Fund (RRPIX) which is based on bonds of a longer maturity. It's rising as well.

Chart 5

Chart 6

NATURAS GAS STOCKS LEAD ENERGY COMPLEX ... Energy stocks are rebounding along with the price of energy products. Chart 7 shows the Energy Sector SPDR (XLE) back over its 200-day average, but still below its 50-day line. Chart 8 shows a stronger chart picture for the AMEX Natural Gas Index (XNG), which has already cleared its 50-day line and is hitting a new high for the year. [Although there's no ETF based on natural gas prices, several natural gas stocks are included in the XLE]. Further evidence of natural gas leadership comes from a study of XLE leaders over the last month. Three of the fastest XLE gainers during January are also leaders in the Natural Gas Index -- Apache Corp., EOG Resources, and XTO Energy.

Chart 7

Chart 8

NATURAL GAS LEADERS DURING JANUARY ... During January, EOG Resources and XTO Energy rose 7.5% and 4.0% respectively (while the XLE has barely broken even). That makes them leaders in a rebounding energy group. Chart 9 shows EOG Resources trading over both moving average lines and trading at a new 2007 high today. The EOG/XLE ratio (below Chart 9) has risen during January. That means that EOG is helping lead the XLE higher. Chart 10 shows an even stronger chart picture for XTO Energy. That stock has been trading over its 50-day average for two weeks and is within a point of a new record high. The XTO/XLE ratio has already hit a new high. The most impressive chart of the three energy leaders, however, belongs to Apache.

Chart 9

Chart 10

APACHE IS BREAKING OUT ... Apache has gained 9% since the start of January and is the biggest percentage gainer in the Energy SPDR (XLE). It's also the biggest gainer in the Natural Gas Index. And it has a bullish chart pattern. The daily bars in Chart 11 show Apache Corp. breaking through resistance barriers formed during the second half of 2006 ranging from 70 to 72. The energy leader is trading over 72 for the first time since last May. The Apache/XLE ratio is also climbing impressively (up arrow). The green point & figure boxes in Chart 12 show today's buy signal taking place at 71. [Although not shown here, Apache touched 73.02 today to also push it one box above its August peak at 72]. That sets up a likely test of its 2006 highs around 75.

Chart 11

Chart 12