MORE ENERGY BREAKOUTS -- KIMBERLY CLARK IS ANOTHER STAPLE LEADER -- MOTOROLA GOES FROM MARKET LEADER TO LAGGARD -- YESTERDAY'S RALLY SHIFTS MARKET INTO A MORE NEUTRAL MODE

ENERGY SPDR HITS NEW 2007 HIGH ... I've recently highlighted new strength in the oil service sector. With crude oil trading back over $61 today (and gasoline inventories dropping for the sixth consecutive week), money continues to flow into the energy sector. Chart 1 shows the Energy SPDR (XLE) rising nearly 2% today and trading at the highest level since the start of 2007. After underperforming the market for most of 2006, the XLE/SPX relative strength ratio has been rising during the first quarter. One way to participate in the energy rise is to buy the Oil Service Holders (OIH) or the Energy SPDR (XLE). Or you could invest in some individual stocks. I recently showed some oil service breakouts (Copper Cameron, National Oilwell and Smith International). Today I'll look at some XLE leaders.

Chart 1

ENERGY LEADERS ... Four out of the five top percentage gainers in the S&P 500 today are from the energy patch. Two of the ones with the strongest chart patterns are shown below. Chart 2 shows Marathon Oil breaking out to a new record high. Chart 3 shows Hess Corp. testing its highs near 56. Both of their relative strength ratios are rising as well. Exxon Mobil is the day's biggest Dow gainer. Chart 4 shows the world's biggest oil company trading back over its 50-day average after recently bouncing off its 200-day line. Its RS line is starting to rise as well. Needless to say, rising energy prices (and energy sector leadership) aren't necessarily good for the rest of the market. Rising energy prices hint at more inflation in the pipeline. All of which suggests that yesterday's euphoric jump in bond and stock prices was probably an over-reaction to ideas that the Fed was getting ready to lower interest rates. It won't be able to do that as long as energy prices are rising.

Chart 2

Chart 3

Chart 4

KIMBERLY CLARK IS ANOTHER STAPLE LEADER ... I've also been showing individual stock leaders in the consumer staples sector, which has been showing better relative strength since the start of the new year. Today's staple leader is Kimberly Clark. The daily bars in Chart 5 show the stock rising very close to its recent high. Its relative strength ratio has been rising since mid-December. The monthly bars in Chart 6 paint an even more impressive picture. They show KMB having recently exceeded its 2000 record high near 66 (and then consolidating over that breakout point). Its relative strength ratio peaked in late 2002 (as the market bottomed) and underperformed for the next four years (as did most consumer staples). The RS line has, however, broken that four-year down trendline and is continuing to rise (blue arrow). Rotation into consumer staples is usually a sign of a slowing economy and a mature bull market.

Chart 5

Chart 6

MOTOROLA DISAPPOINTS ... A disappointing forecast for the first quarter has made Motorola one of the day's biggest losers. Actually, stock has been losing ground both on an absolute and relative basis for several months. The weekly bars in Chart 7 show the stock breaking its three-year up trendline at the end of 2006. It's also broken chart support at its mid-2006 trough. Its relative strength ratio paints a similar picture. The RS line had been rising from the spring of 2003 to the fourth quarter of last year. In other words, Motorola had been a market leader for most of the last four years. The RS line peaked in October of last year and has fallen to the lowest level in two years. From a technical viewpoint, investors should have abandoned the stock months ago. The daily bars in Chart 8 show the recent drop more clearly. At least three moving average sell signals were given before today. The first was the break of the 50-day average (blue circle); the second was the break of the 200-day line (red circle), and the third occurred when the 50-day line fell below the 200-day (red arrow). There were plenty of chart warnings of trouble in Motorola.

Chart 7

Chart 8

WHAT TO MAKE OF YESTERDAY'S RALLY ... I admit to being surprised by the size of yesterday's bond and stock rallies. The Fed statement didn't look that dovish to me. It acknowledged that the housing correction was "ongoing" which isn't good for the economy. It also acknowledged that inflation was still "elevated" and not dropping as the Fed had hoped. That suggests a slowing economy with continuing inflation. Yesterday's dollar drop, and the continuing rally in commodities, testify to the existence of inflation pressures. Commodities rallied again today led by energy and metal markets. That's going to make it very difficult for the Fed to lower rates anytime soon -- even if the economy continues to falter. Having said that, it's never good to "fight the tape". The market liked what it heard and had a strong day. What does that mean?

Chart 9

MARKET HAS GONE FROM BEARISH TO NEUTRAL ... In times of indecision, we have no choice but to fall back on our tried and true technical indicators. The daily bars in Chart 9 apply several of them to the S&P 500. After the recent high-volume market drop took prices close to their 200-day moving average lines and an oversold condition, a market bounce was to be expected. Yesterday's rally, however, exceeded the normal boundaries for a bear market bounce. Not only did it close back over its 50-day average, but it went beyond the 62%-66% normal retracement levels. At the same time, the 14-day RSI line climbed back over 50 and the MACD lines turned positive. What prevents me from jumping on the bullish bandwagon, however, is the fact that some our weekly indicators (like MACD) are still negative. That shifts me to a more neutral posture for the time being. That requires some adjustments to existing positions. For one thing, short positions should have been covered by now. Even if the market is preparing for another upleg, it's highly unusual for it to do that so soon after a sharp selloff. More backing and filling (or a trading range) seems more likely in the immediate future. At such time, it's usually best to follow whatever leadership the market is giving us. Right now, that's consumer staples and energy. That's where I'd be looking to put new money right now. [I used exponential moving averages for the 50- and 200-day averages in Chart 9. The S&P 500 bounced off its 200-day EMA line (red circle) to launch to current rally].

PROSHARES ULTRA SHORT QQQ BREAKS SUPPORT... I recently suggested using the ProShares Ultra Short QQQ to hedge against a bigger market downturn. After breaking out to the upside at the end of February, the QID pulled back to retest its late January peak at 54.39. Chart 10 shows, however, that the QID broke that level pretty decisively yesterday (on higher volume), and also broke its 50-day moving average. Trading discipline suggests selling at least a portion of that short hedge.

Chart 10