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Subscriber e-mail has many implementing strategies

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I can't believe the amount of subscriber e-mail coming in today regarding earlier comments regarding the relative strength charts and I get the feeling a lot of light bulbs have been lit. One subscriber thought he could use this tool to select a mutual fund for is retirement account. Another subscriber figures out my recent commentary and why I thought Semiconductor stocks would outperforms software stocks.

Relative Strength Chart - SOX.X vs. GSO.X

Subscribers are onto me. One subscriber decided to test my "commentary" and went to www.stockcharts.com and their point/figure charts and compared the Semiconductor Index (SOX.X) relative strength against the GSTI Software Index (GSO.X) relative strength. The "red 8" on the above chart is a chart entry that occurred near the beginning of August. On August 10th, I had stated in my commentary that Semiconductor stocks would outperform Software stocks. On August 10th, the SOX.X closed at 593 and the GSO.X closed at 177. Currently, the SOX.X trades 593 (break even from 08/10) and the GSO.X trades 169 (-4.5% from 08/10). Relative strength was part of the reason I felt semiconductors would outperform software.

For and index trader, relative strength can be incorporated into their trading strategies. Relative strength can give hint to where the better bullish/bearish trades can be found. While the above chart is on a 10-point scale, there's no rule that says a shorter-term trader can't cut down the box size to 5 or 2 point increments to give hint of where strength lies.

What's the retirement and mutual fund investor doing? If that investor like mutual funds, then they are most likely reviewing the mutual fund managers top 10 holdings or making some comparisons of different mutual fund holding based on percentage weight to various sectors. I'm guessing the technology fund that is overweight semiconductor stocks vs. software stocks is seeing better net asset value performance than the fund manager that is overweight software. Check out www.mutualinvestor.com if you've got some investments in mutual funds.

Now, the above comparison was only between the Semiconductors and Software. It does little good if both sectors are "weak" on a relative strength basis versus the MARKET (perhaps the SPX is a good measure of the broader market), so always check the relative strength of the sector vs. a broader market benchmark.

Do you see how you work down the scale? Once you identify sectors that are strong vs. the market (maybe you end up with 5 sectors that are strong) you can then begin comparing the sectors against each other to try and determine what sectors are then strongest, and rank them 1-5. As always, monitoring their relative strength at least once a week is recommended. Money flows from sector to sector, and relative strength charts are a great way to determine just where the money is moving.

What to look for from here

I think there will be some fairly firm resistance for the NASDAQ- composite near the 2,000 level. We're seeing some progress made above the 1,900 level today and this 1,900 level was a point where many had thought the NASDAQ should have held before she broke to recent lows of 1,817.

I believe that the Semiconductors and Biotechs are the leading sectors of the NASDAQ and both are performing well today. The Biotech's are lagging a bit (up 2.9%) but they had a pretty good move yesterday. Don't get greedy. A 7-10% gain in the underlying security should have the trader moving up stops or taking some profits at a resistance level.

We're starting to see some selling pick up in the bond MARKET as YIELDS move higher. This is good news for equity bulls. Today's gains should catch some investors eyes and we might see some investors begin to move some money from their money market mutual funds back into some equity funds over the weekend. Should that happen, it will force some mutual funds into selling some bonds and locking in gains to get liquidity to move into stocks. Yes, it's simplistic logic, but often times that's what works best!

At one point today, all 100 of the NASDAQ-100 stocks were in positive territory. It's been a long time since I've seen that. There are some stocks I would not even bother with. Stocks that are under $5 risk being de-listed and removed from the NASDAQ-100 and these stocks that trade under $5 in the NASDAQ-100 are a waste of time in my book. Try to stay focused on "real stocks" and if they're showing weak relative strength, perhaps they need some time to gain sponsorship. Don't waste your time with those that lack relative strength.

Jeff Bailey
Senior Market Technician

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