STOCKS REMAIN ON DEFENSIVE -- CONSUMER STAPLES, UTILITIES AND HEALTHCARE SHOW RELATIVE STRENGTH -- QQQQ LAGS THE BROADER MARKET -- THE TECH TROIKA -- SLOWING ECONOMY MAY WEIGH ON CRUDE

DEFENSIVE SECTORS SHINE... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

Taking their cue from the New York Giants, the defensive sectors are holding their ground. The first image shows the Amex Select Sector SPDRs within the Market Summary page. Eight of the nine sectors were lower on the day. Finance (XLF), Technology (XLK) and Energy (XLE) led the way down. Healthcare (XLV) was the lone gainer with a small advance. Utilities (XLU) and Consumer Staples (XLP) had relatively small losses. Consumer staples, utilities and healthcare represent the defensive end of the market and these three showed relative strength today. In the cases of XLU and XLP, it was less weakness, which can also be interpreted as relative strength.

Chart 1

Chart 2 shows the Sector SPDR PerfChart in histogram format. The S&P 500 peaked on 11 Oct and the timescale extends from 10 Oct to 5 Feb. This covers the downtrend that has been in force since 11 Oct. More importantly, we can see which sectors show relative strength and which show relative weakness during this decline. Keep in mind that this histogram shows performance relative to the S&P 500, not absolute performance. The consumer discretionary, technology and financial sectors lost more than the S&P 500. These three show relative weakness. For example, if the S&P 500 lost 10% and the finance sector lost 15%, then the relative performance of the finance sector would be -5% (10% less 15% = -5%). The consumer staples, utility and healthcare sectors held up best against the S&P 500 and these three show relative strength. The defensive sectors are outpacing the offensive sectors and this reflects a risk-averse market. This also shows the importance of being in the right sector at the right time or avoiding the wrong sectors.

Chart 2

BIG TECHS LEADING THE WAY LOWER ... The Nasdaq 100 ETF (QQQQ) closed below its January (closing) low and continues to show relative weakness. Chart 3 shows a close-only chart for QQQQ. On a closing basis, the ETF closed below its January low and at its lowest level since March 2007. A move below the March 2007 trough would forge a 52-week low for this key technology ETF. Chart 4 shows the year-to-date price performance of QQQQ and four broad market ETFs. QQQQ is down over 16% year-to-date and clearly leading the way lower. The other four ETFs are down from -7.76% to -9.17%. These four may be holding up better than QQQQ this year, but they still show some pretty sizable losses for 2008. John Murphy pointed out the January Barometer last week and large-cap techs had the worst start of all this year.

Chart 3

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BLAME THE BIG THREE... Apple (AAPL), Google (GOOG) and Microsoft (MSFT) are three of the biggest components of the Nasdaq 100 ETF (QQQQ). A look at these three charts shows why QQQQ is down sharply this year. Google and Microsoft peaked in early November, bounced in December and then fell sharply in January. Apple held out a little longer with a peak in late December, but it too fell sharply in January. Apple is down a whopping 38.41% this year, Google is down 27.44% and Microsoft is down 19.89%. These declines compare to the declines we saw in some key financial and retail stocks. Tech stocks are not immune. Despite the January breakdowns, these three stocks are nearing support zones from the August lows and RSI is oversold for all three. The combination of oversold conditions and support could lead to some firming over the next few weeks. We could even see an oversold bounce at some point. At this point, however, all three remain in the falling knife category. Let's see some signs of firmness first.

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OIL TESTS KEY SUPPORT ... After weakening the last few days, West Texas Intermediate Crude ($WTIC) is testing support from its December and January lows. Chart 8 shows $WTIC with a potential double top over the last few months. Crude met resistance around 100 in November and again in early December. Support is around 85 and a break below this level would confirm the double top. Chart 9 shows the uptrend that has been in force for an entire year. The trend line extending up from January 2007 confirms support at 85. A break below this trend line would further reinforce the prospects of a trend reversal. The price of crude is tied to demand and demand is dependent on the economy, the world economy. A slow down in economic growth could decrease demand and this could weigh on prices. Evidence of an economic slowdown is building with the reported decline in nonfarm payrolls last Friday and the sharp drop in the ISM non-manufacturing index on Tuesday. A break down in crude would be further proof that global demand for oil is slowing.

Chart 8

Chart 9