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Cyclicals try to confirm

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As technology sector "rip" higher with the Fiber Optic Index (FOP.X) +9.6%, Internet (INX.X) +8.6%, Disk Drive (DDX.X) +7.96%, Networking (NWX.X) +7.5% and Semiconductor (SOX.X) +6.9% post big gains on the heels of last night's Hewlett-Packard (NYSE:HPQ) $18.90 +12% earnings, we're also keeping and eye on the deeper cyclicals as depicted by the Morgan Stanley Cyclical Index (CYC.X) 459 +3.85% to confirm all this bullishness found in technology stocks.

In this afternoon's market monitor, both Kent and I discussed the point and figure charts of the CYC.X on different scales that certainly lend to an observation that this group is attracting some capital and may well be getting some bullish interest.

Some of the "sub groups" of the deeper cyclicals are aluminum, which on quick look has Dow component Alco (NYSE:AA) $24.60 +8.26% showing strong gains along with another sector bellwether Alcan (NYSE:AL) $30.89 +5.39% breaking out of what looks to be a bullish "cup and handle" formation. Forest/paper products giant and Dow components International Paper (NYSE:IP) $37.45 +4.72% is helping bolster the Forest/Paper Products Index (FPP.X) 286 +6.55% higher. It's fascinating, but the bar chart of IP looks almost IDENTICAL to the 10-year YIELD chart we looked last night in the Index Trader Wrap, and again today at 01:00 PM EST. Chemicals are another portion of the deeper cyclicals. You can't talk chemicals without mentioning Dow component Du Pont (NYSE:DD) 43.94 +3.09%. I note some slight "lag" in DD compared to other mentioned here and will note that PPG Industries (NYSE:PPG) $47.70 -1.44%, a component of the CYC.X and chemical-related stock trades down (session low was $44.14) as this supplier of coatings, glass and chemicals guided Q4 earnings lower this morning to a range of $0.55-$0.60 versus consensus of $0.77, blaming a continued slowdown in overall industrial production as reason for lowered guidance.

Still.... there are some parts of the cyclicals trying to confirm to the upside today and I feel this is needed and continues to be needed for technology stocks to hold their bullish move. The still "lag" of the cyclicals at least keep me from getting too overly weighted in technology stocks at this point.

As we near the close, volume is IMPRESSIVE today and really shows some interest among investors/traders as NYSE volume breaches 1.7 billion shares. NASDAQ volume breaks the 2 billion share level. Folks.... this is some MEANINGFUL volume on some rather impressive upside stock action.

Market breadth isn't quite as bullish as I'd have thought. While still quite bullish with 2 stocks advancing for every 1 stock declining on both the NYSE and NASDAQ, I'd have thought 3:1 would be the level. This tells me that the advance is somewhat narrow and for stock bulls, they'd better be trading bullish in some stronger stocks and preferably those breaking for a good base of consolidation that would provide support on a pullback.

I do find the new highs versus new lows quite bullish compared to past observations in recent weeks. The NYSE shows 45 stocks trading new highs versus 23 stocks at new lows. NASDAQ, which has been stronger in this category of breadth in recent weeks, is also building with 85 stock at new highs versus just 33 stocks at new lows. I don't take notes on a daily basis, but I don't remember the NASDAQ showing 85 stocks at new highs in recent months.

In today market monitor, I do think Jim Brown made a good point for technology bulls to consider. After the close, the semiconductor book-to-bill comes out. Simply from a perspective of risk, a technology bull holding some handsome gains may take some profits before the close, simply to AVOID any type of negativity that might come from the report.

I'm also looking at the 10-year YIELD ($TNX.X) and its close of 4.143%. I really would have preferred a closing YILED above our "neckline" of 4.145%. Very miniscule, but maybe a sign that a shorter-term bull in equities with a handsome profit at risk takes some off the table ahead of the book-to-bill number.

Jeff Bailey

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