INTEL LEADS SEMICONDUCTORS HIGHER -- OTHER CHIP LEADERS ALSO INCLUDE KLAC, NSM, AND TXN -- NEW SOX BUYING IS HELPING BOOST NASDAQ -- COMMODITY ETF HITS NEW RECORD

SEMICONDUCTORS ON THE REBOUND ... Semiconductors have been a frustrating market group. Every time it looks like the group is ready to join the bull market, it suffers a disappointing setback. A good example of that is seen in Chart 1. During April, the Semiconductor (SOX) Index broke out to a new 52-week high. After that, however, the SOX fell back into the middle of the previous trading range which is unusual after a bullish breakout. The good news is that the SOX bounced off its 200-day average and is trading back over its 50-day line. Semiconductor Holders (SMH) have acted more like a group on the upswing. Chart 2 shows the SMH pulling back to its February peak where it found new support. Today it's climbing to a new two-week high. Its relative strength ratio (bottom of chart) is starting to rise again as well.

Chart 1

Chart 2

LONG-TERM TREND IS ENCOURAGING ... Chart 3 shows the Semiconductor Holders over the last five years. Notice that the SMH is trying to break through a resistance line drawn along its 2004/2006 highs. The five-year chart of the SOX gives a slightly different picture, but also with bullish overtones. Chart 5 shows the SOX in the midst of an apparent "ascending triangle" over the last three years. [An ascending triangle is defined by a flat upper line and rising lower line. It's usually a bullish pattern]. The SOX has a lot further to go to achieve a bullish breakout. But the shape of the pattern suggests at least a test of its upper line near 550. Today's standout chip performer is Intel.

Chart 3

Chart 4

INTEL BREAKS OUT ... Chart 5 shows Intel breaking out to a new 52-week high. Its relative strength line is breaking out as well. Because of its size, Intel is exerting a big influence on the chip group. And it's been a long time since that influence has been on the upside. But that may be changing. Chart 6 shows why. The weekly bars show Intel breaking a resistance line drawn over its 2004-2005 highs. That sets the stage for a possible test of the 2005 peak around 27. When a group's bellwether starts to rally, that's usually a good sign for the entire group. Other chip stocks have been showing upside leadership for a longer period of time.

Chart 5

Chart 6

SOX LEADERS ... Chart 7 shows National Semiconductor rising much faster than the SOX Index (solid line). NSM hit a new six-year high a year ago and appears headed for a test of that high near 30. Chart 8 shows Texas Instruments having already touched a five-year high. The ratio below Chart 12 plots TXN versus the SOX Index. TXN is clearly in a leadership role. Then there's KLA Tencor.

Chart 7

Chart 8

KLA TENCOR... Here's another SOX leader. The weekly bars in Chart 9 show KLA Tencor trying to break through its early 2006 high just above 54. Needless to say, an upside breakout would set the stage for a move up to its early 2004 peak. The rising KLAC/SOX ratio (bottom of chart) shows that KLAC has been a SOX leader since last spring. I find the monthly chart even more exciting. Chart 10 shows that KLAC has been trading sideways since 2000. The chart also shows the stock rising above a trendline drawn over the peaks of the last seven years. That would make an upside breakout through its 2006 high even more bullish.

Chart 9

Chart 10

SOX IS HELPING THE NASDAQ ... Arthur Hill showed the Nasdaq market bouncing off its 50-day moving average and chart support along its February high (see line). That's good chart action. The Nasdaq has also been showing better relative strength of late. A lot of that Nasdaq strength is coming from a revived chip group. The line on top of Chart 11 is the SOX Index. Notice the similarity between the two lines. The three arrows on the SOX show the upturn in early March, the upside breakout in mid-April, and this week's upturn. Those SOX arrows match similar up arrows in the Nasdaq Composite Index. Further evidence of new chip leadership is the fact that Intel's gain of 7% over the last week makes it the best percentage gainer of the big tech stocks in the Nasdaq 100.

Chart 11

COMMODITY ETF HITS NEW RECORD ... Commodity prices had a strong day today. The Reuters/Jefferies CRB Index rose 4.86 points with seventeen of nineteen commodities in the black. Crude oil closed over $67 for the first time in nine months. Metals also gained. The biggest commodity gains this week have come from the agricultural sector. Corn, soybeans, and wheat are rallying strongly. Wheat has just hit a new eleven-year high. In case you missed it, the DB Commodities Tracking Index Fund (DBC) closed at a new all-time high today (Chart 12). Don't believe anyone who tells you there isn't commodity price inflation in the making. That's going to keep upside pressure on global interest rates. The Producer Price Index for May came in at an unexpectedly high reading of 0.9%. Economists were quick to point out that core PPI (ex food and energy) didn't go up that much. One economist stated that he didn't see price pressures anywhere. That's easy to say after you've erased all the prices that are actually rising. It would be nice if the rest of us could erase food and fuel from our budgets that easily.

Chart 12