FINANCE AND TECH LEAD MARKET LOWER -- NEW LOWS EXPAND ON NASDAQ AND NYSE -- TRUCKERS AND RAILS DRAG TRANSPORTS LOWER -- AGRICULTURE ETF SURGES

FINANCE LEADS THE MARKET LOWER - AGAIN... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

The stock market took another hit on Wednesday with downside leadership coming from the financial and technology sectors. Relative weakness in the financial sector continues to plague the market. The Financials SPDR (XLF) has been leading lower with a relentless decline the last 5-6 weeks. Chart 1 shows the 14-day RSI moving below 30 for its third oversold reading in 2008. Notice that the RSI never became overbought this year (green arrows). Even when the ETF surged in late January and late April, the RSI never reached overbought levels (above 70). This reflects the strength of the current downtrend. XLF bounced two weeks after its RSI become oversold in January and a week after its oversold reading in March. Notice that small positive divergences preceded these bounces. Prior experience with the RSI suggests that a bounce is at least 1-2 weeks away. Nevertheless, any bounce would still be considered a bear market rally.

Chart 1

The Technology SPDR (XLK) was holding up relatively well last week, but broke down with a sharp decline the last four days. Chart 2 shows XLK breaking the March trend line and May lows over the last three days. Also notice that the ETF failed to hold above its 200-day moving average. The bottom indicator window shows the 14-day RSI bottoming in mid January and moving higher until mid May. With a decline over the last few days, the RSI broke below the January trend line and below 50. Momentum now favors the bears.

Chart 2

NEW 52-WEEK LOWS EXPAND... Charts 3 and 4 show the 10-day SMA for Net New Highs for the Nasdaq and the NYSE. Net New Highs is simply new 52-week highs less new 52-week lows. The indicator is positive when there are more new 52-week highs and negative when there are more new 52-week lows. The rationale behind the indicator is also simple. The bulls have the edge when there are more new highs and the bears have the edge when there are more new lows. I applied a 10-day SMA to smooth the data series.

Despite a decent rally in the Nasdaq from mid March to mid May, the 10-day SMA of Net New Highs never turned positive. The indicator hovered around the --30 to -50 area, but never managed to break above zero. Even though the Nasdaq rallied, new lows were still outpacing new highs. This showed underlying weakness in the rally. With the sharp decline in the Nasdaq over the last few days, the indicator moved lower as new lows expanded. You can click on this chart to see the settings and save it too your Favorites List.

Chart 3

In contrast to the Nasdaq, the 10-day SMA for Net New Highs on the NYSE did move into positive territory. The indicator crossed above the zero line in early April and remained positive until early June. This corresponded with the counter-trend rally. With broad market weakness over the last few weeks, the indicator is back in negative territory and new lows are expanding. The expansion of new 52-week lows is consistent with the assumption that a new leg down is underway. You can click on this chart to see the settings and save it too your Favorites List.

Chart 4

TRUCKERS AND RAILS DRAG TRANSPORTS LOWER... The Dow Transports dropped over 4.5% on Wednesday and broke its 50-day moving average in the process. Thanks to truckers and rails, the Dow Transports had been one of the top performers in 2008. This is especially surprising when one considers the staggering advance in oil over the last four months. However, it looks like broad market weakness and the relentless rise in oil are finally taking their toll. Chart 5 shows the Average meeting resistance just above 5400 over the last few weeks and breaking below its May lows with a sharp decline today. $TRAN also broke through the trend line extending up from the January low. Broken resistance and the 200-day moving average mark the next support area around 4800.

Chart 5

Chart 6 shows the DJ US Railroad Index ($DJUSRR) plunging over 4% today. This index advanced over 50% from January to June and today's decline looks like the start of a correction-at least. A 50-62% retracement of the January-June advance would carry the index back to the low 500s. Support in this area is also confirmed by the rising 200-day moving average. Within the railroad group, charts 7 and 8 show Burlington Northern (BNI) plunging almost 7% on big volume and Union Pacific (UNP) declining over 5%.

Chart 6

Chart 7

Chart 8

Chart 9 shows the DJ US Truckers Index ($DJUSTK) breaking trend line support and its 50-day moving average with a sharp decline today. The index advanced over 40% from mid January to early May and today's breakdown looks like the start of a correction as well. The 200-day moving average marks the next support zone around 330. Within the group, JB Hunt (JBHT) declined over 3%. Despite today's big decline, the stock remains above its May low and has yet to break down.

Chart 9

Chart 10

AGRICULTURE ETF SURGES... In keeping with the inflation theme, the Agriculture PowerShares ETF (DBA) surged over the last six days and broke back above its 50-day moving average. This ETF consists of corn, soybeans, sugar and wheat. All four were up sharply today and this accounts for the sharp rise in DBA. Chart 11 shows weekly prices over the last 12 months. After a correction from March to May, the ETF found support around the 40-week moving average, which is equivalent to the 200-day moving average. Also notice that the decline retraced 38-50% of the prior advance. Chart 12 shows daily prices with a big falling wedge formation. DBA broke above the wedge trend line, 50-day moving average and the May high with a big move over the last two weeks. It looks like the long-term uptrend is resuming and a break from food-related inflation is unlikely.

Chart 11

Chart 12