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The Wilderhill Clean Energy Index is trying to bottom out and should be carefully watchedhere.
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The Philadelphia Oil Service Index (OSX) is back above the 200 area, and its 200 daymoving average.
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The Amex Oil Index (XOI) made an all time high on 7-26.
Technical Summary:
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End Of Month Seasonality At Play
The usually bullish seasonal period starting on the last day of the month and runningthrough the first five days of the new month has arrived.
This is traditionally the time when large pension funds put new money to work in the stockmarket, and often leads to temporarily higher stock prices.
The combination of expectations for the end of the Fed's rate hike cycle, if indeed thisis what is on the way, might add some thrust to this bullish period.
Yet, we remain cautious in making any such predictions, based on the market's ficklenature of late, and the lack of volume on Friday's rally.
The S & P 500 continues to act better than the Nasdaq and the small stocks, so thiswould be an area to concentrate on for those interested in trading this period.
Our S & P Spyder trading model is now an open long.
The S & P has been benefiting from one fact, money flows have turned away from growth,toward reliable earnings, such as those produced by large drug stocks, big oil stocks, andconsumer non-durable companies.
Big oil stocks, utilities, consumer stocks, and large drug companies are starting to seesome money flows are increasingly strong with the Amex Pharmaceuticals Index (DRG) and theConsumer Index (CMR) both testin key long term resistance areas.
Still, if technology was to make a bottom, and start to rally, the current climate fitsthe bill of such a set of developments, given the doom and gloom on the sector.
The unsolved question, then, as it has been for some time is whether any of the risingaction can actually last, and whether it can spread to the rest of the market. And as theaction on 7-20 and 7-21 proved, a big rally day is no guarantee that the market is aboutto embark on a major rally.
If you're a contrarian, this might seem like one of those "blood in the streets"buying opportunities. But caution is still warranted, given the potential for majorproblems to rise in the Middle East, and elsewhere.
From a practical point of view, the next few days might offer a slight to moderate upwardbias, worth trading.
Commodities Still Trading Sideways
Natural gas is showing some relative strength with the $7 area offering support in thenearby futures contract.
Crude oil is still trading near the $75 area with the $80 resistance level proving tough.
Gold is still trading inside the $600-$675 area, with prices responding to news reportsfrom Israel, but also responding to economic news.
Check our energy section for bond, gold, dollar, and currency recommendations.
What To Do Now
See all our sections for new recommendations.
This is a good time to follow the money, but to be prudent in allocation. In other words,this is not a time to be 100% invested, even in strong sectors.
The bond market is also interesting. See our bond trading model, on our energy page.
There are some interesting stocks in the health care and energy areas, as well as ourFallen Angels portfolio.
Our ETF trading systems have been adjusted with our utility trading model finally gettinga wake up call. See the energy section for details.
Remember, our Fallen Angels portfolio is designed for those seeking a potentiallydiversified portfolio with a longer term time frame, and offers both long and shortrecommendations.
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Sentiment Summary:
Happy Friday
The options market got all happy again on Friday's low volume rally, suggesting a weakopen for stocks on Monday.
We've seen this pattern over the last few days. If it holds, a weak stock market will leadto increasing bearishness and put option buying, which should lead to new support for themarket.
We like seeing lots of worried hedgers. As we noted here the Monday (7-24-06) rally instocks took the put/call ratios to nearly bearish levels, again raising doubts about theviability of the rally.
There have been some bullish readings in the option ratios of late. The real question iswhether there is enough bearishness in place to launch as sustainable rally, though.
Healthy advances tend to rise on the back of worry warts who buy put options when themarket falls. But, as the bear market that ended in 2003 showed over and over again,rising put/call ratios are not enough, in and of themselves, to keep a bull market going.When the market falls and put option buyers are absent, it is often a sign that moreselling is coming.
The CBOE Put/Call ratio checked in at 0.88, falling from 1.05. A consistent string of lowreadings can be a sign of excessive optimism and often signals a top in the markets.Readings below 0.5 are of concern, but not as serious as readings below 0.40. Readingsabove 1.0 are bullish. The numbers cited here are meant to be evaluated on a closingbasis.
The CBOE P/C ratio for indexes checked in at 1.54, falling from 2.42. Numbers above 2.0 asthe market sells off, often lead to rallies. Readings below 0.9 suggest too much bullishsentiment, just as readings above 2 are usually required to mark major bottoms.
The VIX and VXN had readings of 14.33 and 19.26, both drifting lower. A fall near or below20 on VIX and 30-40 on VXN is considered negative, a fact that is usually confirmed whenthe volatility indexes begin to rise. Readings above 40 and 50, respectively, are oftensigns that a bottom may be close to developing.
The Duarte Overbought-Oversold Gauge (DOOG) rose to 45% from a reading of 15%, after itfell to zero on 6-23 staying in buy signal territory, for its fifth week in a row.
NYSE insiders were sellers of stocks for the week of 7-14-06. NYSE insider short sales arestill at very low levels. When NYSE specialists raise their short sales, and sell stocks,risk increases dramatically. There is a two week lag for these figures.
Market Vane's Bullish Consensus rose to 62% on on 7-28-06, again remaining neutral afterseveral consecutive sell signal levels. This indicator has been calling for a pullback instocks for several weeks. Buy signals occurr when the indicator falls to 40% or less.
Market Moves
Health Care ETF Breaks Out As Internet Sinks
The Merrill Lynch Pharmaceuticals HOLDRS Trust (AMEX: PPH) broke out to a new high on7-28, with Abbot (NYsE: ABT) among its best performing components of late, as Yahoo(Nasdaq: YHOO) flounders.
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Large drug companies have been making their way back to the top of the momentum lists overthe last few weeks.
There are two key factors involved. First, the Medicare drug plan is starting to pay off,perhaps better than expected.
The plans seem to have expanded the market for the drug companies.
Second, the economy is slowing, making earnings predictable companies such as the drugsector more interesting to mutual fund managers and pension funds, who have to remainfully invested.
The othe side of the issue is the fact that drug stocks had been badly beaten up forseveral years.
But, as money has poured out of the Internet and technology sector, it looks as if thedrug stocks are the beneficiaries.
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The Amex Biotech Index (BTK) is starting to rise along with the drug sector.
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The Amex Pharmaceuticals Index (DRG) again closed above 340, a three year high.
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The Philadelphia Semiconductor Index (SOX) is again trying to bounce back.
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Small stocks are trying to bottom along with the market, but are not particularly strongright now.
