TECHS GIVE BACK EARLY GAINS -- QQQQ AND MDY LEAD SINCE MARCH -- FINANCE SHOWS RELATIVE WEAKNESS -- SOUTHWEST AIRLINES BUCKS THE TREND -- THE VIX HITS SUPPORT ZONE

TECHS LEAD AFTERNOON RETREAT ... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

Spurred by a tame reading in the Consumer Price Index (CPI), stocks moved higher in early trading with techs leading the charge. However, a wave of selling pressure hit in the afternoon and techs led the retreat. The Nasdaq 100 ETF (QQQQ) gave back all of its gains and closed the day with a small loss. I showed the QQQQ chart last week as the ETF stalled near resistance at 49. After today's failed rally, Chart 1 shows that resistance around 49 is still in play. Resistance in this area stems from a 62% retracement of the Dec-Jan decline and broken support (Nov low).

Chart 1

Despite today's failed rally, QQQQ remains in a medium-term uptrend and overbought. In fact, this is a classic case of a security becoming overbought and remaining overbought as it trends higher. The bottom indicator window shows the Stochastic Oscillator (20,5,5) becoming overbought twice in April. After crossing above 80 on 21-April, the indicator has remained in overbought territory the last 3 1/2 weeks. QQQQ is both overbought AND strong as long as the Stochastic Oscillator hovers above 80. However, these extended overbought conditions suggest that QQQQ is ripe for at least a pullback. Look for a move below 80 to signal some weakness.

QQQQ AND MDY LEAD... The next two charts compare the performance of five major index ETFs. Chart 2 shows performance for the year-to-date and the Chart 3 shows performance since 10-March, which is when the current rally began. The S&P 400 Midcap ETF (MDY) is the only one of the five to show a gain year-to-date. The remaining four ETFs are still underwater year-to-date (Dow Diamonds (DIA), S&P 500 (SPY), Russell 2000 (IWM) and Nasdaq 100 (QQQQ)). QQQQ has the biggest year-to-date loss of the group. Despite being negative year-to-date, a different picture emerges when we look at QQQQ since 10-March. This big-tech ETF is up over 18% since 10-March and has been leading the market since mid April. This occurred when the red line (QQQQ) broke out of the pack and remained above the rest. MDY is still holding its own by taking second place (up over 14%) Small-caps (IWM) are in a respectable third place (up over 11%).

Chart 2

Chart 3

FINANCE IS LAGGING... There are signs of discontent in the Finance sector. Over the last two weeks, the Finance SPDR (XLF) is by far the weakest of the nine sector SPDRs. In fact, this sector is down over 3% in the last two weeks. In contrast, the Energy SPDR (XLE) and Technology SPDR (XLK) are both up over 3%. As the single biggest sector in the S&P 500, relative weakness in Finance is not a good sign for the broader market.

Chart 4

Chart 5

On Chart 6 the Finance SPDR (XLF) failed to hold above its resistance break in early May and fell back to its 50-day last week. With this decline, XLF broke the lower trendline of the rising wedge. The ETF stalled over the last four days and a break below the 50-day would argue for further weakness. The bottom indicator window shows the price relative, which compares the performance of XLF against the S&P 500. Despite advancing from mid March to early May, the price relative remained flat and XLF never showed relative strength.

LUV PACES AIRLINES... Chart 7 shows that Airlines have been serious underperformers since January 2007. Over the last 16 months, the Amex Airline Index ($XAL) declined from the mid 60s to the low 20s. This decline accelerated from early February to late April. Even though the trend is clearly down, the index is way oversold and possibly ripe for an oversold bounce. However, I would still classify the index in the falling knife category. One might get lucky and catch the handle, but one could just as easily get cut.

Chart 6

Chart 7

Within the group, there are signs of strength coming from Southwest Airlines (LUV). Chart 8 shows LUV forming a double bottom with relatively equal lows in January and March. The stock broke double bottom resistance with a surge in late April and then consolidated above the breakout. After a big surge today, LUV is now challenging its 200-day moving average. The bottom indicator shows the price relative (LUV:SPX ratio). Relative to the S&P 500, LUV has been holding its own this year and a break above the red resistance line would reflect relative strength.

VIX GETS OVERSOLD ... After a nine week rally in the stock market, the S&P 500 Volatility Index ($VIX) is entering a support zone. Volatility declines as the stock market moves higher. Chart 9 shows the VIX establishing support around 16-19 in October and December. After peaking above 32 in March, the indicator declined back to support in May. Continued weakness in the VIX would be bullish for stocks. However, a successful support test and bounce would be bearish. The October surge in the VIX coincided with the October-November decline. The bounce in late December coincided with the December-January decline. Now that the VIX is hitting support again, traders should be on guard for a bounce that could coincide with selling pressure in stocks. The bottom indicator shows the Commodity Channel Index (CCI) for the VIX. This oscillator became oversold in early April and has remained below zero since then. A surge above zero in CCI would be bullish for VIX momentum and could foreshadow a reversal in volatility.

Chart 8