TELECOM HOLDER SHOWS GOOD RELATIVE STRENGTH -- AT&T AND VERIZON ARE THE MAIN HOLDINGS -- ALTHOUGH BOTH HAVE STRONG CHART PATTERNS, VERIZON MAY OFFER THE BETTER VALUE

TELECOM HOLDERS ... In some of my recent messages, I've been highlighting defensive groups like consumer staples, healthcare, energy, and gold. Telecom should also be included in that group. I've written several positive articles on the telecom group over the past two years, with the most recent one on March 27. [You can search the archived Market Messages by typing "telecom" into the search box]. With the market at a critical juncture, this looks like an opportune to revisit this defensive group. Along with basic materials (which are being helped by rising commodity prices), Telecom Holders are one of the few groups in the plus column today. Chart 1 also shows the Telecom Holders (TTH) trading above its 50-day moving average. The TTH bounded off its 200-day line in mid-August. What also impresses me is its steady relative strength ratio (bottom of chart). That line has been rising all year. It was especially strong in late July when the rest of the market started rolling over. And it's starting to rise again. That's why it's called a defensive group. The two main holdings in the ETF are AT&T and Verizon.

Chart 1

AT&T AND VERIZON SHOW GOOD RELATIVE STRENGTH ... Charts 2 and 3 show AT&T and Verizon showing good chart action. Last Thursday, AT&T closed at the highest level in a month on rising volume. Its relative strength line (bottom of chart) is close to a new high. Chart 3 shows Verizon trading up today and challenging initial resistance near 43. Its relative strength line is rising as well. The fact that both stocks are trading well above their 50-day averages is another sign of strength (especially with most major stock indexes unable to do the same).

Chart 2

Chart 3

WHY VERIZON MAY BE THE BETTER VALUE... Charts 4 and 5 show both AT&T and Verizon in major uptrends. AT&T turned up first, however, at the start of 2006 both in absolute and relative terms as shown in Chart 4. Verizon didn't break out convincingly until this spring (although its relative strength line turned up in mid-2006). Although both charts look strong, Verizon appears to hold the better value. One reason is that it's closer to its breakout point near 36 (see flat line) and hasn't traveled as far as AT&T. Another reason is shown in Chart 6. That chart plots a ratio of Verizon divided by AT&T. After falling for several years, the VZ:T ratio bottomed during April and been rising since then. It's also broken a down trendline going back more than two years. That suggests to me that Verizon may hold more upside potential than AT&T. If you don't want to choose between the two, Telecom Holders are a good alternative.

Chart 4

Chart 5

Chart 6

FINANCIALS WEIGH ON MARKET ... The financial sector is down more than 1% today (as are consumer discretionary stocks) and both are weighing on the rest of the market. The few groups in the black are commodity-related stocks in basic materials, gold, and energy (and telecom). On Friday, I listed some things that needed to happen to improve the market's short-term outlook. One I didn't mention was an upturn in financial stocks. The minimum requirement for that to happen would be a decisive close over the 50-day average by the Financials SPDR (XLF) shown in Chart 7. That resistance line sits at 34.17 today. Speaking of the 50-day average, Chart 8 shows the NYSE Composite Index struggling with that resistance line today as well. The two key levels to watch on Chart 8 are resistance at 9736 and support at 9377. Sooner or later, one of those two levels will be broken. That will probably determine which way the market is going to turn from here. And that will probably be determined by what the Fed decides to do tomorrow.

Chart 7

Chart 8