OIL SERVICE HOLDERS LEAD ENERGY SECTOR INTO ANOTHER TEST OF OLD HIGHS -- CONOCOPHILLIPS AND HALLIBURTON ARE ENERGY LEADERS -- STRONG CANADIAN DOLLAR IS GOOD FOR OIL PRICES -- SURGING LUMBER MARKET MAY HOLD GOOD NEWS FOR HOUSING SECTOR

ENERGY SPDR TESTS JANUARY HIGH... One of the themes I've repeated over the past few weeks is that commodity-related stocks should start playing catchup to the rest of the market. I mentioned energy stocks in particular. After a modest dip last week, the energy sector is today's strongest market group. And it may be about to get even stronger. Chart 1 shows the Energy Sector SPDR (XLE) right up against its January high. An upside breakout appears imminent which would put the XLE at the highest level since 2008. The relative strength ratio below Chart 1 shows that the energy sector has underperformed the rest of the market since last October. That fits into my theme that energy may now represent one of the best values in the current market. Last Thursday I showed Chevron hitting a new 52-week high and wrote that increased the odds for an XLE breakout. CVX is the biggest holding in the XLE. Chart 2 shows another big XLE holding -- ConocoPhillips -- having already hit a new recovery hgh. Its RS line (below Chart 2) has already broken its six-month down trendline. Oil service stocks are also having a good chart day.

Chart 1

Chart 2

OIL SERVICE HOLDERS HIT THREE-MONTH HIGH... In percentage terms, oil service stocks are the strongest part of the oil patch. Chart 3 shows Oil Service Holders (OIH) climbing 4% today (versus 2.1% for the XLE). In addition, the OIH has broken out to the highest level in three months. Its relative strength line (below chart) appears to be turning up as well. Another sign of OIH leadership comes from the fact that the five top percentage gainers in the XLE today are oil service stocks. One of them is Halliburton which is also hitting a new three-month high (Chart 4). HAL is also one of the group's biggest stocks. One of the group has already exceeded its January high. Chart 5 shows Cameron International trading at a new 52-week high. It's time to "energize" your portfolio.

Chart 3

Chart 4

Chart 5

CANADIAN DOLLAR LEADS OIL HIGHER... Another theme I've been writing about is that continuing strength in commodity-based currencies carries a bullish message for commodity markets. The Canadian Dollar is a good case in point. The "loonie" is surging again today and is near a new 52-week high (Chart 6). It has now passed "parity" with the U.S. dollar. [Canadian central bankers are hinting that more economic strength and the threat of inflation may force them to hike short-term rates]. What's good for Canada is normally good for commodities. Chart 6 shows a pretty good correlation between the Canadian Dollar (green bars) and the price of oil (solid black line). New highs by the CDW would increase the odds for a similar high in the USO. I suspect that's one reason why energy stocks are rallying so strongly today. That also helps explain why oil and other commodities have been rallying in the face of a relatively strong US Dollar Index.

Chart 6

SURGING LUMBER MAY CARRY GOOD NEWS FOR HOUSING ... Commodities tied to the economy have been especially strong (copper and steel for example). That includes lumber. Chart 7 shows lumber prices surging to the highest level in nearly four years. Lumber is most closely tied to housing (and stocks tied to housing). The recent increase in building permits suggests that homebuilders plan to build more houses. And they need lumber to do that. That's a sign of confidence. The top line in Chart 7 shows the PHLX Housing Index (HGX) tracking higher with the price of lumber after both bottomed together last March. The line along the bottom of Chart 7 is the relative strength ratio of housing stocks versus the S&P 500. It is trading at the highest level in seven months. That means that housing stocks are now among the market's 2010 leaders.

Chart 7

HOUSING LEADERS ... The PHLX Housing Index (HGX) is a broad measure of the housing industry that includes homebuilders as well as other stocks involved in home improvement, building products, and construction aggregates. Chart 8 shows five of the top performers in the HGX over the last year. All are at or near 52-week highs. In order of strength, they include Hovnanian Enterprises, Temple Inland, Masco, Lennar, and Weyerhaeuser. They're all trending in the same direction as copper, steel, and lumber which is up. That's a positive sign for the economy.

Chart 8