IBM AND CHIP STOCKS LEAD MARKET LOWER -- SEMICONDUCTOR INDEX THREATENS 200-DAY AVERAGE -- NASDAQ 100 IS IN DANGER OF DEATH CROSS -- CORPORATE BONDS PAY HIGHER YIELDS BUT TREASURIES ARE SAFER

FORMER TECH LEADERS GAP DOWN TODAY... The technology sector is leading the market lower today. Two of the big reasons for that is sharply lower openings in two large tech stocks that had been former leaders. Chart 1 shows IBM gapping down 5% this morning and trading below its 50-day and 200-day moving averages. Its rising relative strength line (below chart) shows that Big Blue has been a market leader since April. Not anymore. The same is true of Texas Instruments. Chart 2 shows that big chip stock also gapping 5% lower to fall below its moving average lines. TXN had also been a market leader until today. Today's down gap in TXN also leaves a potential "island reversal" top. That bearish pattern occurs when a stock gaps down after recently gapping higher leaving an "island" of prices overhead (see box). TXN also appears to have failed at its June high just below 26. The drop in TXN is also taking a bearish toll on the semiconductor group.

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Chart 1

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Chart 2

SEMICONDUCTOR INDEX THREATEANS 200-DAY AVERAGE... A number of chip stocks are fallng sharply today in addition to Texas Instruments (like SanDisk, Broadcom, and Teradyne). As a result, the Semiconductor (SOX) Index is the day's weakest group. Chart 3 shows that key technology index sitting right on its (red) 200-day average. That's usually an important test for any market. Another concern for the market is that chip stocks have shown relative strength throughout the spring selloff as evidenced by the rising relative strength line (below chart). Loss of leadership from that group would add another negative feature to the market. That's especially true for the Nasdaq market which is often viewed as a proxy for the technology sector.

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Chart 3

POWERSHARES QQQQ NEARS DEATH CROSS... As we've explained in previous messages, the so-called "death cross" takes place when the 50-day m.a. crosses below the 200-day m.a. I've explained that that negative signal becomes more serious as more stock indexes experience that bearish pattern. Major stock indexes that have done so include the Dow Industrials, the S&P 500, the NYSE Composite Index, and the Nasdaq Composite Index. The Nasdaq 100 is in danger of doing the same. Chart 4 shows the PowerShares QQQ Trust which measures the trend of the largest 100 Nasdaq stocks. The blue 50-day line is testing the red 200-day line. A negative crossing would be a negative sign for it and the rest of the market. The relative strength line (below chart) shows some loss of Nasdaq 100 leadership during July. That another cautionary sign for the overall market.

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Chart 4

ALL BOND CATEGORIES ARE RISING... I've written in several messages that bonds are usually the top-performing asset class in a deflationary environment (while stocks and commodities are not). A number of readers asked which bond categories I was talking about. Most of my historical intermarket research has focused on Treasury bonds. That's the bond category that is considered the safest and the one that has the biggest negative correlation with stocks. At the moment, however, all bond categories are rising as well. [Arthur Hill showed yesterday, however, that Treasury Inflation Securities (TIPS) had started to slide recently on diminished inflation concerns. So I'm going to exclude TIPS for the time being]. Chart 5 shows relative strength lines for four bond ETFs since the start of 2010 (measured against the S&P 500 which is the flat black line). Not surprising, the two strongest bond categories this year have been the 20- and 10-Year T-Bond ETFS (TLT and IEF). However, investment grade (red line) and high yield (green line) corporate bond ETFS have also done better than stocks. There's a tradeoff with the two last bond categories which has to to with reward versus risk. In a climate of relatively low interest rates, investors looking for higher yield can look to high-yield and investment grade corporates (in that order) for higher yield. Problem is those two categories also carry more risk. The good news is all bond caterogies are in the black during 2010 while the S&P 500 has lost -4%. That isn't always the case however.

Chart 5

TREASURIES ARE THE SAFEST ... Chart 6 shows how the three main bond categories performed since the start of 2008 which includes the subprime meltdown of 2008 and subsequent recovery in 2009. During the entire period, Treasury bonds (black line) did the best (19%) versus 10% percent for investment grade corporates (blue line) and 9% for high yield corporates (red line). The chart shows that the two corporate categories fell sharply during 2008 while Treasuries soared. 2008 demonstrates the higher risk element in corporate bonds when stocks are weak. Since the start of 2009, however, corporate bonds have done better than Treasuries as stocks rose. During 2010, Treasuries have regained the lead as stocks have weakened. The moral of the story is this. All bond categories usually do better than stocks when stocks are in a downtrend (as at present). At such times, Treasury bonds are the safest bond category. Investors seeking higher yield can certainly buy into corporate bonds. Just be aware, however, that the higher yields in corporates also carries more risk.

Chart 6