CHEMICALS AND SEMICONDUCTORS LEAD MARKET HIGHER -- TAIWAN SEMICONDUCTOR KEEPS TAIWAN ETF IN NEW LEADERSHIP ROLE -- MICROSOFT CLEARS ITS 50-DAY AVERAGE

CHEMICALS BOOST BASIC MATERIALS ... Basic materials have been one of the market's strongest groups this year. A lot of the reason for that has to go to strong buying in the chemical group. Chart 1 shows the Dow Jones US Chemicals Index ($DJUSCH) climbing 1.7% and hitting a new record high today. Its relative strength ratio (bottom of chart) has been rising over the last year and is nearing its early 2005 high.

Chart 1

ROHN & HASS JUMPS 10%... Part of today's buying in chemicals is due to the proposed takeover of Lyondell Chemical (LYO) which is up 16% today. Another upside catalyst is a $2 billion backback of the shares of Rohm and Haas (ROH). Chart 2 show that stock gapping 10% higher today on very strong volume. The monthly bars in Chart 3 put the stock's longer-term uptrend in better perspective. They show that stock having broken through its 2000 highs a year ago and trading now at a new record high. Its relative strength ratio is also encouraging. After climbing from 2000 to mid-2002, and then trading sideways for five years, the RS line is finally breaking out to the upside. Chart 4 plots a weekly version of the ROH/S&P ratio. It shows the ratio rising to a nearly five-year high in today's trading. Although today's upside gap makes the stock over-extended on a short-term basis, its longer-term trend looks bullish. Other chemicals showing strong gains today are Dow, Dupont, and Eastern Chemical.

Chart 2

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Chart 4

EASTMAN CHEMICAL REACHES NEW HIGH ... Another standout performer in the group is Eastman Chemical. Today's 3.5% gain puts the stock at a new 52-week high. The monthly bars in Chart 5 also show that the stock is now trading over its previous high point at 68.01 in early 1996. Eastman is now trading over 70 for the first time in its history. While Dow Chemical is trading at a new two-year high today, Dupont is trading at the highest level in seven years. The monthly bars in Chart 6 show Dupont trading over its early 2005 peak at 50.96. Its relative strength line has been showing some improvement as well over the last year.

Chart 5

Chart 6

MORE CHIP BREAKOUTS ... Semiconductors are on another tear today. Their 1.4% gain is second only to the chemicals. While the Semiconductor (SOX) Index is trading at a new 52-week high, Semiconductor Holders (SMH) are trading at the highest level in three years. The SMH is also the day's strongest domestic ETF. I'm reshowing three of the larger chip stocks that are achieving important upside breakouts. I've shown all three over the last month, but they're worth showing again. The charts pretty much speak for themselves. All three are trading at new 52-week highs today. Altera is nearing a test of its early 2004 high (Chart 7). Applied Materials is trading at a new three-year high (Chart 8). KLA Tencor, which may have the strongest chart pattern of the three, is trading at a new three-year high and appears to have broken out of a seven-year bullish "symmetrical triangle".

Chart 7

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TAIWAN ETF LEADS -- THANKS TO TSM ... On June 21, I wrote a story on how an upside breakout in Taiwan Semiconductor was helping put Taiwan iShares in a new leaderhip role. That's still the case. Taiwan iShares (EWT) are the day's top Exchange Traded Fund. Chart 10 shows the EWT trading at the highest level since 2000. More telling, however, is the recent upturn in the ratio of the EWT to the EAFE iShares (EFA) (bottom of Chart 10). That puts Taiwan in a new global leadership role for the first time in years. A large part of that is due to recent buying in Taiwan Semiconductor (TSM). That's because TSM is the biggest holding in the EWT. Chart 11 shows TSM trading recently at a new five-year high, and having broken its major down trendline two years ago. It's been in an uptrend since then. Since it's trading on the NYSE, I plotted its ratio line (blue line) against the S&P 500. It too appears to be on the verge of an upside breakout (see box). I continue to believe that semiconductors are one of the best places in the market to be right now -- from both a momentum and a valuation standpoint.

Chart 10

Chart 11

RAILS CARRY DOW TRANSPORTS TO NEW HIGHS ... With the Dow Industrials at a new record highs, let's not overlook a similar upside breakout in the Dow Transports. That upside confirmation by both Dow Averages keeps the Dow Theory uptrend intact. Most of the recent transportation buying is in the rails. Three of the today's top five percentage gainers in the transports are Burlington Northern, Norfolk Southern, and Union Pacific. Chart 13 show Union Pacific trading at a new record high today.

Chart 12

Chart 13

MICROSOFT CLEARS 50-DAY LINE... I've been showing a number of large cap technology stocks that have given new leadership to the Nasdaq market and the market as a whole. Part of that buying is also attributed to investor preference for large cap stocks. In last Friday's bullish article on General Electric, I made reference to an April 27 message entitled "General Electric and Microsoft Are Latest Big Blue Chips to Start Leading". While GE has reached a new six-year high, Microsoft has been a relative laggard. That may be about to change. The daily bars in Chart 14 show MSFT trading sideways since January. After bouncing off its 200-day average, Microsoft has climbed back over its 50-day line. That's usually a sign that the correction/consolidation is over. There's a good chance that the big tech stock will now challenge its 2007 high. Its relative strength ratio (bottom of chart) is also starting to bounce off chart support at its 2007 low.

Chart 14