AIRLINES AND FINANCIALS LEAD MARKET HIGHER -- AMR, CAL, AND LUV BOUNCE OFF LONG-TERM SUPPORT LINES -- SOUTHWEST IS UPSIDE LEADER --AIRLINE RALLY MAY BE ANOTHER SIGN THAT OIL HAS PEAKED

AIRLINE INDEX CLEARS 50-DAY LINE ... Another possible sign that oil prices have peaked was today's spectular rally in airline shares. Chart 1 shows the AMEX Airline Index (XAL) jumping 22% today to make it day's strongest group by far. In addition, the XAL clearled its 50-day moving average for the first time since February. Airlines are the group most sensitive to energy prices. I don't think it's a coincidence that airlines are the market's strongest group on the same day that energy stocks are the weakest. Or that airlines are outperforming the market for the first time all year during the same week that crude prices are giving signs of rolling over. The rising relative strength line (below chart) shows this week's upside leadership coming from the airlines.

Chart 1

AIRLINES BOUNCE OFF LONG-TERM SUPPORT... To say that airlines have been badly beaten down would be a gross understatement. The good news, however, is that they may have finally reached a potential support zone. Charts 2 and 3 show AMR and Continental forming upside monthly reversals from potential support formed between 2003 and 2004. Chart 4 shows Southwest Airlines bouncing off its 2002 low near 11. Let's focus on LUV which has the strongest of the three patterns.

Chart 2

Chart 3

Chart 4

SOUTHWEST AIR LEADS AIRLINE GROUP ... Chart 5 shows Southwest Air surging more than 5% today on very heavy volume. The airline leader is trading at the highest level in eleven months. Its relative strength line (top of chart) is already at a 52-week high. Chart 6 shows why this upturn in Southwest is so significant vis a vis the price of oil. Chart 6 plots the LUV/SPX ratio (red line) since 2000. The black line is the price of crude. The relative underperformance of LUV started in early 2002 as the price of oil started to rally (along with other commodities). The real plunge in airline performance, however, began in late 2003/early 2004 as crude approached a record high above $40. The recent surge in LUV's relative strength line (and this week's takeoff in airlines) may be another hint that the price of oil has peaked. Although the market still has other problems, this week's surge in airlines may be a sign that the recent drop in oil prices may be contributing to the beginning of a healing process.

Chart 5

Chart 6

FINANCIAL SPDR SURGES 8% ... Another sign of possible healing was today's 8% surge in the Financials SPDR in heavy trading. Chart 7 shows that the XLF is right up against its 50-day average. Its relative strength line has jumped this week as well. That's not enough to signal a major bottom, but is certainly a turn for the better. Chart 8 plots the XLF:XLE ratio since the start of the year. The ratio measures the relative performance of financials versus energy stocks. The ratio has surged this week to well above its 50-day line. At least over the short-run, the pendulum seems to have swung away from energy and back to financials. That's another positive sign for as long as it continues.

Chart 7

Chart 8