RISING TECHNOLOGY APPEARS TO BE WINNING BATTLE WITH WEAK FINANCIALS -- ALTERA IS ANOTHER SOX LEADER NEARING BULLISH BREAKOUT -- GOLD SHARES ARE STARTING TO PULL BULLION HIGHER -- FALLING DOLLAR BOOSTS COMMODITIES AND FOREIGN SHARES

TECHNOLOGY OVERCOMES FINANCIAL WEAKNESS ... On Friday June 29, I wrote about a tug-of-war going on between a strong technology sector (which is good for the market) versus a weak financial sector (which is bad). So far, it looks like technology is winning the battle. The three lines in Chart 1 tell the tale. The top line, which is the Technology Sector SPDR (XLK), is the strongest of the three. The red line, which is the Financial Sector SPDR (XLF) is the weakest. The blue line in between is the S&P 500. Although the S&P 500 has yet to hit a new high, the fact that the Nasdaq market has increases the odds that other market indexes will soon follow suit. Most of the buying in technology continues to come from the Internet and semiconductor groups.

Chart 1

ALTERA NEARS BULLISH BREAKOUT ... Arthur Hill and myself have been writing about the recent upside breakout in the Semiconductor (SOX) Index. We've also shown some upside leaders in that key technology group, including Intel. Both are hitting new 52-week highs today. Another leader in the chip group is Altera. I found that out by looking at the top percentage gainers in the technology sector last week (using our Sector Carpet). Altera's 7.8% gain put it in second place behind Nvidia's 8.2%. The two lines in Chart 2 compare Altera (black line) to the SOX (blue line) over the last eighteen months. Although both are rising, Altera is rising much faster than the SOX. One of things we try to do in stock picking is to find the strongest stocks in the strongest groups. With chip stocks moving up in the relative strength rankings, Altera qualifies on both counts. Its chart pattern also look promising. The weekly bars in Chart 3 show Altera trading near a new two-year high after having broken a three-year resistance line. The ALTR:SOX ratio has been rising since the start of 2006. That makes Altera a leader in a rising semiconductor group. [For those not familiar with relative strength ratios, they are created by dividing one entity by another. In this case, the symbol to be used is ALTR:$SOX. The ratio simply shows how a stock (ALTR) is doing relative to its group ($SOX) or to the general market ($SPX). It's an extremely powerful tool].

Chart 2

Chart 3

GOLD SHARES LEAD COMMODITY HIGHER ... With the U.S. Dollar falling last week, precious metal shares were the week's strongest group. Chart 4 shows the Gold & Silver (XAU) Index
moving up to challenge its 2007 highs just below 150. A decisive close over those chart barriers would be a bullish breakout. Chart 4 shows the streetTracks Gold Trust (GLD) bouncing off chart support at its March low and its 200-day average. The daily MACD lines have just turned up. The fact that gold shares are rising faster than the commodity is a bullish sign for both.

Chart 4

Chart 5

GOLD SHARES SHOULD BE LEADERS ... I recently wrote an article showing that gold does best when gold shares are leading it higher. Chart 6 is a ratio of the Gold & Silver (XAU) Index divided by the gold bullion (GLD). During the six-year bull market in gold, bullion has risen faster when the ratio has also risen. A rising ratio signals upside leadership by gold shares. Chart 6 shows the ratio peaking during the first quarter of 2006. Since then, gold and its shares have been in a corrective/consolidation phase. I wrote not too long ago that the ratio needed to break its eighteen-month resistance line before a significant metal rally could start. Chart 6 shows the ratio doing just that (see circle). That greatly increases the odds that the precious metals complex may finally be in a position to see significant price gains. Dollar weakness is giving a boost to most other commodities as well and stocks tied to those commodities like basic materials and energy.

Chart 6

CRB INDEX NEARS BULLISH BREAKOUT... I also recently wrote that the Reuters/Jefferies CRB Index appeared on the verge of a bullish breakout over its fourth quarter high. The daily bars in Chart 7 show the CRB on the verge of doing just that. Strength in the energy patch is helping that happen. The brown line is the Constant Commody Index (CCI), which has a smaller energy weighting. The CCI is near a new record high. Commodity strength (and rising bond yields) are two of the side effects of a falling dollar. Another is stronger foreign markets.

Chart 7

FALLING DOLLAR BOOSTS FOREIGN SHARES ... I've shown the next chart several times in the past to demonstrate the impact of the U.S. Dollar on the relative performance of foreign stocks. The green line is the U.S. Dollar Index (USD) since the start of the year. The purple line is ratio of the EAFE iShares (EFA) divided by the S&P 500. [The EFA is a international stock benchmark that includes Europe, Australasia and the Far East]. When the ratio is rising, foreign stocks are rising faster than U.S. stocks. And that's exactly what's happening at the moment. The reason why that's happening is the falling dollar. Chart 8 shows an inverse relationship between the Dollar Index (green line) and the EFA/S&P ratio (purple line). Foreign stocks did better during the first quarter as the dollar fell. They slipped during the second quarter as the dollar rose. The latest upturn in the ratio took place in mid-June just as the dollar was peaking (see arrows). Asia is leading foreign markets higher. That includes Japan which closed today at a new seven-year high. Other Asian leaders over the last week were Hong Kong, Singapore, South Korea, and Taiwan. Since those Asian markets have been traditionally tied to technology stocks, and semiconductors in particilar, I suspect there's a link between the two. You might want to reread two recent articles entitled "Semiconductor Buying May be Linked to Stronger Asia" (June 21) and Taiwan Semiconductor Is Rising With Chip Stocks and Boosts Taiwan ETF" (June 15).

Chart 8

S&P TREND IS STILL UP ... The sideways pattern in the S&P 500 looks more like a consolidation than a top. The odds for a move into new highs is increased by the recent upside breakout in the Nasdaq market. Chart 11 shows that the moving average combination of the 13- and 34-day EMAs is still up. The two lines touched a week ago, but have since strengthened. That keeps the short-term trend rising. The blue line would have to cross below the red line to give a short-term sell signal. Chart 12 shows point & figure boxes for the S&P 500. [Although the more usual box size is 1%, I'm using a .50% box size to show more detail]. The p&f boxes show the S&P consolidating within an uptrend. A close at 1540.70 or higher (which appears likely) would resume the uptrend. It would take a close at 1480.40 or lower to give a short-term sell signal. That doesn't seem likely at the moment.

Chart 9

Chart 10