FALLING OIL BOOSTS AIRLINES -- SOUTHWEST REMAINS AIRLINE LEADER -- BIOTECHS HAVE BEEN JULY'S STRONGEST GROUP -- AMGEN HAS BEEN A BIOTECH LEADER FOR NEARLY A MONTH -- A STRONGER DOLLAR IS HURTING COMMODITIES AND HELPING STOCKS

OIL RESUMES DOWNTREND... A bounce in the dollar today is causing more selling in commodities. Gold, grains, and oil are all falling as a result. A $3 drop in the price of crude has pushed the United States Oil ETF (Chart 1) below its early June low near 100 and has resumed the downtrend in crude that started earlier in July. As result, oil (and gold) stocks are in the red today as the rest of the market is advancing. Chart 2 shows the Energy Sector SPDR (XLE) trading well below its 200-day average. Its relative strength line (below Chart 2) shows that energy stocks have fallen from their former leadership position. The drop in oil is helping to boost consumer discretionary and financial stocks. Airlines, however, continue to get the biggest boost from falling fuel costs.

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Chart 2

AIRLINE INDEX SOARS 11% ... My Market Message of last Tuesday wrote about the new buying in airline stocks. The message also suggested that the sharp upturn in fuel-sensitive airlines was another sign that oil had peaked. It's no concidence then that airines are up 11% today (and are the market's strongest group) on the same day that crude is falling to a three-month low. Chart 3 shows the AMEX Airline Index clearing its 50-day average last Tuesday for the first time in five months. Its relative strength line has turned up as well. I take that as a positive sign for this group and the market as a whole. That's because a bottom in airlines is usually one of the first signs that falling oil prices are having a beneficial impact on the market as a whole.

Chart 3

SOUTHWEST IS IN THE LEAD ... Last Tuesday's Message also showed that Southwest Airlines was the current airline leader. Chart 4 compares the performance of the major airlines since the start of the year. Although all have bounced over the last month, Southwest Air (black line) is the clear leader. It's also the only airline to have cleared its 200-day moving average. Chart 5 shows Southwest Air (LUV) having reached the highest level in nearly a year. Upside volume has been impressive. Its relative strength line is already at a 52-week high. Chart 6 shows LUV having recently bounced off major chart support near its 2002 low around 11. The airline leader is now challenging a resistance line drawn over its 2006-2007 highs. Its RS line is doing the same. There's a lot to be said for buying a group leader. Especially a group that's just starting to bottom.

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BIOTECH'S ARE JULY LEADERS... Biotechs are a good example of why it's a good idea to follow where the hot money is going. We've written numerous stories over the past month on money flowing into the healthcare sector, and biotechs in particular. We've suggested a number of ways to participate in the biotech rally. The simplest is via an Exchange Traded Fund. Chart 8 shows the Biotech iShares (IBB) turning up at the start of July and in the process of testing their October high. Its relative strength line has soared. Chart 9 shows the Biotech Holders (BBH) trading at a new record. The stronger performance in that ETF is due to its largest holding which is Genentech. Although we're not recommending new entry into biotech at this point, I'm showing the charts to demonstrate that the biotech upturn nearly a month ago was pretty obvious on both an absolute and a relative basis when we first pointed it out. The same was true for individual biotech stocks.

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AMGEN HAS BEEN BIOTECH LEADER... Once we've isolated a group that's showing new upside leadership, the next step is to look for individual stock leaders. Over the past month, biotech leaders that we've highlighed include Amgen, Celgene, Genzyme, and Genentech. All have done quite well since we pointed them out. I'm going to focus on Amgen today because it's one of the market's strongest stocks. Amgen has surged over the past two days to the highest level in a year (and on very strong volume). On July 3, however, we showed Amgen closing over its 200-day moving and earmarked the stock as a biotech leader just as the group was starting to advance. Its relative strength line also broke out to the upside three weeks ago. Here again, we're not recommending purchase of Amgen at these lofty levels. What we are doing is demonstrating why it's important to find market groups that are starting to show new leadership (as the biotechs did nearly a mongh ago). And then find stock leaders in that group. Amgen is a good example of how well that technique can work. And you don't need to wait for Wall Street upgrades (as occurred yesterday and today) after the good news is out.

Chart 9

FINANCIALS AND ENERGY REVERSE ROLES ... Financials stocks may also be benefiting from the drop in oil prices. Chart 10 is a ratio of the Financial SPDR (XLF) divided by the Energy SPDR (XLE). I showed this same ratio a week ago to demonstrate that a role reversal has taken place in those two competing groups. Financials are now doing better than energy stocks for the first time in a long time. Chart 11 shows the recent rebound in the XLF backing off from its 50-day average. The good news is that upside volume has been larger than downside volume. That suggests that the XLF may be ready for another run at its 50-day line. That would give the rest of the market a needed boost.

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DOLLAR CLEARS 50-DAY LINE ... Here's how I see the short-term intermarket scenario playing itself out. A stock market rebound is in play. That's causing bond prices to drop and bond yields to rise. Rising U.S. bond yields are boosting the U.S. Dollar. The stronger dollar is causing selling in commodity markets. Chart 12 shows the PowerShares US Dollar Bullish ETF (UUP) trading over its 50-day moving average today for the first time in a month. That's one of the reasons that gold and oil are selling off, and why stocks are rallying.

Chart 12