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Crack the whip!

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Stocks have had a reversal of fortunes in the past two hours and it doesn't look as if the sharp rebound is being driven by any stock specific news. Earlier today it was mentioned in our commentary that Treasury bond traders were saying that there may have been an asset allocation shift taking place as Treasuries were seeing selling, but at the time, stocks here hovering near their lows of the session.

Two groups that did show some sign of a shift into their asset category was the semiconductors and biotechs. Both the Semiconductor Index (SOX.X) 399.47 +5.12% and Biotech Index (BTK.X) +5.09% now lead sector gainers.

Semiconductor Index Chart - Daily Interval

The SOX.X has reversed rather sharp in what looks to be a short- covering rally from the base of its lower trending regression. A break back above the 409 level and 80.9% retracement level would be the first sign of a sustainable move taking place.

A quick look at the Semiconductor HOLDRS (AMEX:SMH) $31.50 +5.88% show a broad sector rally taking place, with Intel (NASDAQ:INTC) and Applied Materials (NASDAQ:AMAT) most heavily traded in the sector.

Semiconductor HOLDRS Components - Sorted by Volume

Both Intel (INTC) $19.88 +6.13% and Applied Materials (AMAT) $20.07 +6.98% are trading heavy volume today. INTC normally trades about 48 million shares per day, while AMAT's average daily volume is about 29.4 million shares. The above average volume in INTC may hint that institutions may actually be playing an earlier scenario we mentioned whereas INTC would be the "stock of choice" in the group should the sector rebound. Our thinking was that AMAT and its semiconductor equipment sales would be dependents on Intel's (INTC) future success and that any bulls in the sector would most likely seek exposure to INTC prior to AMAT. Both stocks are showing equal % gains here, but volume is more than double for INTC versus AMAT today.

Jeff Bailey
Senior Market Technician
Option Investor

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