LIST OF CYCLICAL STOCK LEADERS -- NATURAL GAS STOCKS LEAD ENERGY COMPLEX HIGHER AS THE COMMODITY BOTTOMS -- MARKET MAY BE LOSING SEMICONDUCTOR LEADERSHIP BUT BENEFITS FROM BANK REBOUND -- TUMBLING DOLLAR GIVES BOOST TO COMMOTIES

LIST OF CYCLICAL STOCKS ... On Monday, I wrote an article showing that the Morgan Stanley Cyclical Index (CYC) had led the stock rally since March, and suggested that was a good sign for the market and the economy. One reader asked what stocks were included in the index. Chart 1 lists the 30 stocks in order of their % weighting in the CYC. [You can find what stocks are included in many of these indexes by going to AMEX.com]. The MS Cyclical Index is designed to measure economically-sensitive stocks in 25 industries which include autos, metals, papers, machinery, chemicals, and transportation. As a result, its performance helps gauge the mood of investors on the direction of the market and the economy. Chart 2 shows the improvement in that mood since March.

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Chart 2

CYCLICAL INDEX AT SIX-MONTH HIGH ... Chart 1 shows the CYC rallying to the highest level in six months from its March bottom. After exceeding its January high, it's now testing its 200-day day average and has retraced 38% of its decline since last May. That puts it in a potential resistance area. A yearlong resistance trendline can be seen near the 50% retracement line. What's especially encouraging is the jump in its relative strength ratio below Chart 2. That suggests that investors are looking beyond the current economic trough to better times ahead. Over the short-run, however, the rally looks over-extended, especially considering that the index has doubled in price since March and its RSI line has reached overbought territory over 70 (arrow) .

NATURAL GAS STOCKS SHOW LEADERSHIP AS THE COMMODITY BOTTOMS ... While the recent rally in crude oil has helped support a nice run in energy shares, natural gas has been an energy laggard. But it too may finally be bottoming, which may explain this week's run on natural gas stocks. Chart 3 shows the United States Natural Gas Fund (UNG) climbing over its 50-day average for the first time since last July. And it's doing so on strong volume. That may qualify natural gas as the best value in the energy complex which may explain today's heavy buying of its related stocks. Chart 4 shows the Natural Gas Index (XNG) rising more than 5% today to the highest level in six months. It's also the first energy index to exceed its 200-day moving average. The relative strength line below the chart is breaking out as well.

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NATURAL GAS LEADERS ... Chart 5 shows the fifteen natural gas stocks included in the XNG in order of their their % weighting in that index. The following charts show two of the biggest stocks that have already broken out to the upside : XTO and Southwestern Energy. Both natural gas leaders also show rising relative strength lines. Within a strong energy sector, three of the day's five top percentage gainers today are in natural gas: El Paso (+15%), Chesapeake (+9) and Anadarko (+6%). Chart 8 shows Anadarko rising to an eight-month high. With the summer months just ahead, people are going to start using air conditioners which run on natural gas.

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SEMI HOLDEERS TURN DOWN ... Arthur Hill pointed out earlier in the week that new signs of relative weakness in the technology sector was a caution sign for an overbought stock market. Nowhere is that more evident than in the Semiconductor Holders (SMH) which are one of the weakest groups for the week. Chart 9 shows the SMH falling back below its 200-day average and on rising volume. More notable is the drop in its relative strength line (below chart) which fell to the lowest level in more than two months. Loss of technology leadership comes at a bad time for the major stock indexes which are up against overhead resistance barriers and looking over-extended.

Chart 9

BANKS SURVIVE STRESS TEST... After suffering a downside reversal on Thursday, financial shares rebounded on Friday with banks regaining 10%. The fact that the bank relative strength line is still rising also helped the market rebound from a bad Thursday. Chart 10 shows the Bank Index nearing potential resistance at its 200-day moving average and January resistance near 45. Having lost technology leadership, the market needs financial leadership to continue its spring rally.

Chart 10

DOLLAR DROP BOOSTS COMMODITIES... Last Friday's message suggested that a peak in the U.S. dollar was beneficial to commodities which usually trend in the opposite direction. That inverse relationship was evident this week. Chart 11 shows the PowerShares US Bullish Fund (UUP) tumbling below its 200-day average on Friday. Right on cue, the DB Commodities Tracking Index Fund (Chart 12) broke out to the highest level in four months. The two strongest commodities sectors are agriculture and energy. Gold rallied enough to close over its 50-day average (Chart 13). Silver iShares did even better reaching the highest level in more than two months (Chart 14). The falling dollar makes commodity investments especially attractive.

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