OIL SERVICE STOCKS ARE STRONGEST ENERGY PLAY -- USING A MARKET CARPET TO FIND ENERGY LEADERS -- EARLIER MONTHLY SELL SIGNAL HAS BEEN ERASED -- S&P 500 NEARS TEST OF 50-DAY AVERAGE -- NASDAQ 100 HAS ALREADY CLEARED THAT BARRIER

OIL SERVICE LEADS ENERGY SECTOR... Energy stocks have resumed their role as one of the market's strongest sectors. But there's more to it than that. We can break the energy sector down into three groups to see where the real energy leaders lie. All three lines in Chart 1 are plotted against the S&P 500 which is the black zero line. The chart covers the five months from the end of the first quarter. The top blue line is the PHLX Oil Service Index (OSX), which has outperformed the S&P by nearly 24% during that time period. The lower red line is the AMEX Oil Index (XOI) which is composed of large integrated oil companies. The XOI did better than the S&P by near 9%. The worst energy group is the AMEX Natural Gas Index (XNG) which is the green line. Natural gas stocks have not only been the weakest energy group, but they've done worse than the S&P since the end of March. The chart tells us two things. One is that energy stocks are a good place to be right now. The other is that oil service stocks are the best place to be in the energy complex.

Chart 1

USING A MARKET CARPET TO FIND ENERGY LEADERS ... Market Carpets are an excellent way to find leaders in a market index (like the Nasdaq 100) or a market sector (like energy). Chart 2 is a Sector Carpet for Energy. [Go to Market Carpets, S&P Sector Carpets and click on top arrow to see nine sector carpets. Then click on Energy]. Although you'll initially see the rankings for today, you can adjust the number of days by moving the bottom box to the left. I've gone back 11 days to view the energy leaders over the last two weeks (when the current rally started). The darker the green box, the stronger the stock. Losers are shown in red. The table to the right shows the top five percentage gainers in the Sector SPDR (XLE) over the last two weeks. Four of the top gainers are in the oil service category -- NOV, SII, WFT, and SLB. Now the fun starts. You can click on those four leaders to see their charts. Some charts look stronger than others and some judgement is involved at that point. By screening for leaders through the Market Carpets, however, the number of charts to look at is limited to energy leaders.

Chart 2

CHARTS OF FOUR OIL SERVICE LEADERS... By simply clicking on the names of the four oil service stocks, you get the four following daily bar charts. They show National OilWell Varco and Smith Intl hitting new record highs (Charts 3 and 4). Chart 5 shows Weatherford Intl nearing a record high as well (it needs a close over 60). Chart 6 shows Schlumberger nearing a test of its old high as well. You can also rank those four stocks according to size. By "right clicking" on Market Cap Mode, you'll see that Schlumberger is the biggest of the four stocks. NOV and WFT are about even, while SII is the smallest. Given the market's preference for larger stocks, that would favor Schlumberger. A simpler method is to buy the Oil Service Holders which includes all four stocks. Chart 7 shows the OIH trading at a four-week high and back over its 50-day moving average. It's relative strength has been rising as well. One simple way to identify market leaders is to look for groups that are trading back over their 50-day lines. Two group indexes that qualify are oil service and the Nasdaq 100.

Chart 3

Chart 4

Chart 5

Chart 6

Chart 7

NO MAJOR SELL SIGNAL GIVEN ... On August 20, I showed the MSCI World Ex USA Index on a "tentative" sell signal using monthly MACD lines. I warned, however, that no "official" signal could be given until the end of the month. The global bounce over the last two weeks has prevented a monthly sell signal from being triggered. The monthly histogram bars (which plot the spread between the two MACD lines) ended the month just above the zero line. Although no actual bearish crossing of the two lines occurred, the latest histogram value is still at the narrowest (weakest) reading in more than four years.

Chart 8

WEEKLY MACD LINES IMPROVE, BUT ARE STILL NEGATIVE ... Most of our short-term market indexes have switched from negative to positive, reflecting the market's price improvement over the last two weeks. The daily MACD lines, for example, have turned positive for the S&P 500. To me, the weekly signals are more important. Chart 9 ovelays the weekly MACD lines on the S&P. The lines are still negative (the faster black line is below the slower red line). No intermediate buy signal will be given until the black line crosses back over the red line. The histogram bars, however, show improvement in the spread between the two lines. Although still below the zero line (negative alignment), the weekly histogram bars are starting to rise. That means that the spread between the two MACD lines is starting to narrow. Traders often take that improvement as reason to cover existing short positions, but not necessarily enough to turn bullish. The main conclusion we can take from the weekly MACD lines (and histogram) is that the market trend isn't as bearish as it was, but hasn't turned bullish either.

Chart 9

DAILY MOVING AVERAGE TRENDS ... I've written in the past about a moving average combination that has an excellent track record in calling market turns. Chart 10 overlays the 13- and 34-day exponential moving averages on the S&P 500. Trading signals are given when the two lines cross. A short-term sell was given in late July when the 13-day EMA (blue line) fell below the 34-day EMA (red line). Although the S&P is trading back above both lines, the lines are still negative. The blue line needs to move above the red line to erase the July sell signal. The line along the bottom of Chart 10 plots the spread between the two EMAs. The line is starting to rise which means that the spread between the two EMAs is narrowing. That's a good sign. The bottom line, however, needs to cross back above zero to turn positive again.

Chart 10

TESTING 50-DAY AVERAGES ... Sometimes it's better to keep things simple. And nothing is simpler that tracking what the market does relative to its two main moving averages. With most market indexes back above their 200-day averages, they're now approaching a test of their 50-day lines. Chart 12 shows that the S&P 500 is nearing a test of that resistance line (as are the Dow and the NYSE Indexes). The Nasdaq Composite closed right on its 50-day line. That index is being pulled higher by the bigger stocks in the Nasdaq 100 (which are, after all, the biggest 100 stocks in the Nasdaq market). Chart 14 shows the Power Shares QQQ Trust (QQQQ) ending the week well above its 50-day line. The QQQQ ended the week just shy of its early August peak at 49.06. Advancers beat losers by a 6 to 1 margin on the big board and nearly 3 to 1 on the Nasdaq. Volume was light again, but this is the last Friday in August. We should get better read on trading activity when traders return from the beach next week. Commodity markets have rallied along with stocks this week. Chart 13 shows the streetTracks Gold Trust (GLD) jumping the equivalent of $8.00 today. Part of the commodity bounce is due to a weaker dollar which has lost some of its recent "safe haven" status. The dollar had been trending in the opposite direction of stocks and gold of late. It still is.

Chart 11

Chart 12

Chart 13