MUTUAL FUND LEADERS OVER LAST TWO MONTHS ARE ENERGY, GOLD, HEALTHCARE, AND CONSUMER STAPLES -- PROCTER & GAMBLE AND PEPSI HIT NEW HIGHS -- COKE NEARS SIX-YEAR HIGH -- FINANCIAL BOUNCE HELPS MARKET GAIN MORE GROUND

FIDELITY RANKINGS ... Using the Fidelity Carpet, I looked at the rankings of sector mutual funds over the last two months. Not surprisingly, two of the top sectors were energy and gold which reflected strong action in their respective commodities. Arthur Hill and I have been writing a lot of bullish commentary on the biotech group. Since we've been showing biotech ETFs and individual biotech stocks, I thought I'd show what the sector mutual fund looks like. And it looks pretty good. Chart 1 shows the Fidelity Select Biotechnology Fund (FBIOX) which has gained 5.7% over the past two months (putting it in second place behind energy's gain of 8.5%). The daily chart (plotted through yesterday) shows the biotech fund very close to breaking out of an apparent bullish "ascending triangle" extending back to the first quarter of 2006. [An ascending triangle is defined by two converging trendlines, with a flat upper line and a rising lower line. It's usually a bullish pattern]. An upside breakout would put the fund at a new six-year high. The fund's relative strength ratio (along bottom of chart) has just broken a resistance line going back more than a year. A biotech sector mutual fund is another way to participate in this newly-popular group.

Chart 1

CONSUMER STAPLES FUND HITS NEW HIGH ... Consumer staples are considered to be defensive in nature. As a result, the group tends to attract money when the market and/or the economy starts to show signs of weakening. Judging from Chart 2, that's just what the group has been doing. It shows the Fidelity Select Consumer Staples Portfolio (FDFAX) hitting a new record high yesterday. The more important line may be the relative strength ratio (bottom of chart) which broke out to a new high over a month ago. That shows good absolute and relative strength. Eighty percent of the stocks in that fund are in American stocks. By going to Fidelity.com you can see the top ten holdings in the fund (or any Fidelity fund). I thought I'd show you some of the stronger ones.

Chart 2

CONSUMER STAPLE LEADERS ... One of the reasons for the strong performance in the Fidelity Consumer Staples Fund is that its biggest holdings also happen to be its strongest stocks. Its biggest holdings include Procter & Gamble, Coca Cola, Pepsico, CVS, and Colgate Palmolive. Charts 3 and 4 show PF and PEP already trading at record highs. Notice the jump in their relative strength ratios since mid-July. Two other stocks not too far from a new high are CVS and Colgate Palmolive. Coca Cola had been a relative laggard, but is playing catch-up.

Chart 3

Chart 4

COCA COLA NEARS SIX-YEAR HIGH ... The monthly bars in Chart 5 show that Coca Cola is still in an early stage of a new uptrend. Earlier this year, it broke through its 2004 and 2002 highs at 50 and 53 respectively. The stock is within a couple of points of a six-year high. Its relative strength ratio has risen to a three-year high. Coke may represent one of the best values in the consumer staple group. Although Pepsi has hit a new record, the KO:PEP ratio in Chart 6 shows that Coke has been doing better than its soft drink competitor over the last year.

Chart 5

Chart 6

FINANCIALS SHOW SOME BOUNCE ... In a role reversal, financial stocks were the day's top performer. Consumer Discretionary stocks (which have also been very weak) came in second. Chart 7 shows, however, that the Financials Sector SPDR (XLF) has a long way to go to reverse its current downtrend. The first thing it has to do is clear its 50-day average. It would then have to clear its August high. Its relative strength ratio is trying to stabilize above its early August low, which shows some modest improvement. Housing stocks and REITs also showed good gains today. Although they're still in downtrends, the market took some encouragement from their ability to bounce.

Chart 7

TRADERS AWAIT FED DECISION ... Encouraged by a strong financial sector, the market gained more ground today. Chart 8 is representative of how the major blue chip averages look at this point. It shows the NYSE Composite Index closing right on its 50-day moving average. Breadth was positive by a two to one ratio on the big board. Despite that short-term improvement, volume was light again. The continued light trading is most likely due to the Fed's important meeting next Tuesday. Although the market expects a rate cut, traders seem unwilling to make large commitments until the Fed makes clear what it intends to do (and what it says while it's doing it). I suspect trading will pick up after that which should give a better read on the market's direction.

Chart 8