MARKET TREND MAY DEPEND ON WHETHER TECHNOLOGY STRENGTH CAN OVERCOME FINANCIAL WEAKNESS -- SOME RECENT NASDAQ LEADERS -- DELL BREAKS OUT -- SHORT-TERM S&P 500 TREND CONTINUES TO WEAKEN
TUG OF WAR GOING ON ... It seems to me that a tug of war is going on in the market between two opposing forces. On the positive side is the recent resurgence in technology shares. That's usually good for the market. On the negative side is recent selling in financial shares owing to rising interest rates and subprime mortage concerns. That's normally bad for the market. The lines in Chart 1 show the disparity. The two top lines are the Internet (black line) and Semiconductor indexes (blue line). They've been acting much better of late and are two of the market's strongest groups. That largely accounts for recent relative strength in the Nasdaq. The two weak lines are the Bank Index (green line) and the Financials Sector SPDR (red line). You can add to the weak side of the ledger consumer discretionary stocks, which include homebuilders and anything tied to housing.
Chart 1
ROLE REVERSAL BETWEEN FINANCIALS AND TECHNOLOGY... Chart 2 compares the Technology SPDR (black line) to the Financial SPDR (blue line) over the last eighteeen months. The chart shows that financial stocks have gone from 2006 leaders to 2007 laggards. Financial stocks had been stronger performers during most of the the four-year bull market in stocks. The pendulum is now shifting in favor of technology.
Chart 2
RELATIVE STRENGTH FAVORS TECHNOLOGY ... There's another way to compare the relative performance of the two key market sectors. Chart 3 is a ratio of the Technology SPDR (XLK) divided by the Financials SPDR (XLF) over the last four years. The ratio fell for most of that time which favored financial stocks. Since last summer, however, the rising ratio has favored technology. The fact that the ratio has broken a three-year resistance line suggests technology outperformance will probably continue. I'm not sure what that means for the overall market. But it does suggest that technology may be one of the most undervalued parts of the market. That's a reversal from the situation in 2000 which technology was the most overvalued.
Chart 3
SOME NASDAQ LEADERS ... I used our Market Carpets to find leaders in the Nasdaq 100 Index. I looked for stocks that combined strong relative performance with size. I chose the "biggest" stocks because that's where money has been flowing over the last year. Four stocks I came up with are shown below. Cisco and Oracle have gained 42% and 36% respectively since last summer. Intel and Dell gained a smaller 29% and 17%. Since the start of 2007, however, Dell and Intel have come on much stronger. Let's take a look at the price charts of all four.
Chart 4
CISCO AND INTEL ... Chart 5 shows that Cisco started to attract new money just about a year ago -- both in absolute and relative terms. Since the start of 2007, the stock has been stalled beneath its early 2004 peak near 30. New buying over the last week suggests that the stock may be ready to challenge that resistance once again. A close over that chart barrier would be a major bullish breakout. Chart 6 shows the Oracle turned up at the start of 2006. Oracle needs a close over 20 to record a new six-year high.
Chart 5
Chart 6
DELL AND INTEL ARE JUST STARTING TO RALLY ... Intel and Dell have been poor performers over the last seven years. Their recent strong performance -- both in absolute and relative terms, however -- warrants some attention. The monthly bars in Chart 7 show Intel breaking a three-year resistance line. Its relative strength ratio has done the same. That's a healthy combination. Dell has been the weakest of the four stocks. Chart 8, however, shows the stock turning higher over the last month. The daily bars in Chart 9 show Dell breaking through its late-2006 high to record a 52-week high. Its relative strength ratio has been rising since the middle of March. Those four big tech stocks account for most of the recent leadership in the Nasdaq market.
Chart 7
Chart 8
Chart 9
BIGGEST THREAT IS FROM FINANCIAL SECTOR ... If there is a serious threat to the ongoing bull market in stocks, it's in the financial sector. For one thing, financial stocks have the heaviest sector weighting in the S&P 500. For another, financials usually act as leading indicators for the rest of the market. Which brings us to Chart 11. That chart shows the Financials SPDR (XLF) falling well below its February high and its 200-day moving average. What's really disturbing is the collapse in the fincancial relative strength ratio. Continuing weakness in financial stocks increases the odds for some corrective action in the market to the downside. It would probably take a drop below the March low by the XLF, however, to trigger a more substantial market selloff.
Chart 10
SHORT-TERM TREND CONTINUES TO WEAKEN... The market's short-term trend continues to deteriorate. The daily bars in Chart 11 show the S&P 500 unable to climb back over its 50-day moving average. In addition, the daily MACD lines are still falling. The real key, however, is whether or not the S&P can avoid a close below its June lows. An upside reveral day on Wednesday prevented that from happening. When in doubt, I often go to point & figure boxes for clarity. Chart 12 used a 0.5% scale for the S&P 500. It shows that the uptrend that started in March at 1415 is still intact. It would take an S&P close at 1480 or lower to interrupt that three-month uptrend and warrant some short-term profit-taking. Whether or not that happens will probably be determined by the trend in financial stocks. And whether or not recent technology buying can offset financial weakness.
Chart 11
Chart 12
