SEMICONDUCTOR SURGE GIVES MARKET A BIG BOOST -- THAT'S MAY ALSO BE HELPING BULLISH BREAKOUT IN ASIA -- A WEAKER DOLLAR SHOULD ALLOW COMMODITIES (AND STOCKS TIED TO THEM) TO PLAY CATCHUP TO THE STOCK MARKET -- NATIONAL SEMICONDUCTOR BREAKS OUT

SOX INDEX SOARS... Nearly two weeks ago (April 1) I showed the Semiconductor (SOX) Index breaking through its January high at 370 and noted that was giving a nice boost to technology shares and the market as whole. That positive effect is even more obvious today. Chart 1 shows the SOX gapping up 3.7% to trade at the highest level in nearly two years. Its relative strength ratio (below chart) is breaking out as well. It's usually a good sign for the market (and the technology sector) when the chips are leading it higher. The weekly bars in Chart 4 put the today's price jump in better perspective. It shows the SOX trading at the highest level since the spring of 2008. It also shows that the next resistance level (and potential upside target) at 429 (the second quarter 2008 peak). That's about 8% above today's price level. The rising relative strength line (below Chart 2) shows that the SOX has been leading the S&P 500 higher since the end of 2008.

Chart 1

Chart 2

SOX RALLY MAY BE BOOSTING ASIA... I find it interesting that Asian markets are having an especially strong day. Singapore and South Korean iShares (not shown here) are jumping nearly 4% and 2% respectively to new 52-week highs. That Asian strength is reflected in the MSCI Pacific Ex-Japan iShares (EEP) in Chart 3 which has broken decisively through its late 2009/early 2010 highs. I point this out because a historical correlation has long existed between semiconductors and Asia (which is a big producer of semiconductors). Whether or not that's behind today's surge in Asia, that's certainly helping to fuel strong gains in global stocks and commodities. You may recall my observation on April 1 that the upturn in Chinese shares was also bullish for stocks and commodities.

Chart 3

COMMODITY RALLY CONTINUES ... A combination of rising stocks and a falling dollar is continuing to boost commodity markets (more on that later). Chart 4 shows last week's upside breakout in the DB Commodities Tracking Index Fund (DBJ) when it cleared its February/March highs near 24. That broken resistance level should become new support. And that's just what happened. After consolidating above that new support point (see line), the DBC has climbed to a new three-month high. Gold is also doing well. Last week's upside breakout in GLD at 112 put new support at that level. Chart 5 shows GLD holding that support level and starting to rally again. One of our readers asked where support was likely in crude oil. Chart 6 shows that would be at $84 which was the broken January high. Crude is up near $2 today along with most other commodities. Part of the reason for that is an upturn in the Euro and a drop in the Dollar Index.

Chart 4

Chart 5

Chart 6

UPTURN IN EURO PUSHES UUP LOWER... I wrote last week that the Euro looked undervalued and the U.S. Dollar Index overvalued. That view was based primarily on the observation that most other foreign currencies (outside of Europe and Japan) had bottomed in February. So it comes as no suprise to the DB Bullish Dollar Fund (UUP) breaking its 50-day average (Chart 7) for the first time since December. The biggest reason for the drop in the UUP is the upturn in the Euro which has just exceeded its 50-day line for the first time this year (Chart 8). The drop in the UUP comes two months after commodities bottomed but should serve to strengthen them even further. The same goes for material and energy stocks tied to those commodities which have market laggards during 2010.

Chart 7

Chart 8

COMMODITIES SHOULD START PLAYING CATCHUP... One of the intermarket effects of a falling dollar is that commodities (and stocks tied to them) should start playing catchup to the rest of the stock market. Here's a couple of reasons why. Since 2003, a generally positive relationship has existed between stocks and commodities as shown in Chart 9. Notice, however, that commodities peaked in mid-2008 which was more than half year after stocks. That's the normal pattern. Historically, commodites have peaked after stocks (not before). At the moment, however, stocks are hitting new highs while commodities aren't. Chart 9 also shows that stocks and commodities trended in the opposite direction of the Dollar Index over the last year. That changed somewhat during 2010. Chart 10 shows that the rising Dollar Index (green line) has had a dampening effect on commodities this year. That makes sense since commodities are more sensitive to dollar trends than stocks. If the USD is truly peaking here, that should enable commodity assets to start catching up to the stock market. That analysis also suggests that commodity related stocks (precious metals, energy, and materials) represent good value at this point.

Chart 9

Chart 10

ENERGY ETF NEARS TEST OF OLD HIGH... With commodities lagging behind the stock market, it's no surprise to see stocks tied to those commodities doing the same. Energy is a case in point. Chart 11 shows the Energy SPDR (XLE) nearing a test of its January high (while most other stocks have already broken out). The solid line is a relative strength ratio of the XLE to the S&P 500 and has been falling all year. If my analysis is correct, and the falling dollar gives a bigger boost to commodity markets, I would expect energy stocks to start doing better as well. Another intermarket tendency is for energy stocks to show market leadership in the late stages of a market rally. We haven't seen that yet. Which suggests that a period of energy (and commodity) leadership still lies ahead.

Chart 11

NATIONAL SEMICONDUCTOR IS BREAKING OUT... Many chip stocks are hitting new 52-week highs and are well beyond their normal buy points. While looking through the individual charts for a stock that is just breaking out, I uncovered our last chart of the day. Chart 12 shows National Semiconductor breaking the upper line in a bullish "symmetrical triangle". The relative strength line below the chart shows that NSM has been a market laggard. In fact, it's been one of the worst performers in the SOX. Today's upside breakout, however, may offer an entry point for a chip stock that's beginning to show some strength.

Chart 12