Option Investor
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Stocks continue to stumble lower

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Stocks continue their weekly decline with the Dow Industrials (INDU) 7,676 -1.08% off 82 points, the broader S&P 500 Index (SPX.X) 810 -1.02% lower by 8.4 points and NASDAQ-100 Index (NDX.X) 945 -1.28% falling 12 points.

Sector weakness is being found in the Airline Index (XAL.X) 29.39 -7.02% as this group holds today's sector loser spot and now looks ready to challenge its 52-week lows of 26.12 found on October 10, 2002. ExpressJet (NYSE:XJT) $8.30 -27.9% are leading the decline after the regional carrier rescheduled delivery of 60 of it 78 firm orders for the 50-seat ERJ 145 XR jet with Brazilian aircraft manufacturer Empresa Brasileira de Aeronautica SA.

The news has hit the commercial carries on further thought that geopolitical events are pressuring both leisure and business travel segments, on consumer fears of potential terrorist activity, while at the same time, business look to scale back corporate travel frequency in order to contain costs.

While the airlines lead today's sector declines, the bulk of sectors we follow are also broadly lower and most trading down greater than 1%.

Sector strength is limited with the Gold/Silver Index (XAU.X) 73.30 +2.89% jumping back above its still trending higher 200-day SMA of 71.80, after falling below this longer-term moving average yesterday. On the commodity side, the February Gold futures contract (gc03g) 358.0 +1.53% gets a technical bounce from its rising 50-day SMA of 350, which was tested as support earlier this morning. Earlier this month I mentioned that Dorsey/Wright and Associates sector bullish % was at longer-term "overbought" levels at 76%. The recent decline in gold stocks now has this sector bullish % in "bear alert" status at 64.5%. As such, I'd be looking for resistance in the XAU.X to build just under the 76.00 level.

Weakness in the U.S. dollar as depicted by the U.S. Dollar Index (dx00y) 99.75 -0.75% has the dollar index, which is weighted against seven major foreign currencies, back below the 100.00 level and breaking back below the shorter-term 21-day SMA. I view this as rather "bearish" toward equities, which have tended to take notice of dollar action. My views here are that a weaker dollar is sign of foreign capital leaving the U.S. and U.S. assets.

The weakness in the dollar combined with further buying in Treasuries leaves stocks vulnerable here and "starved" for cash needed to prop prices in my opinion. The 10-year YIELD ($TNX.X) 3.896% is falling (buying in Treasury creates lower YIELD) as it breaks to a weekly low. I've set an alert on this YIELD at the January 24th YIELD low of 3.871% to signal further buying in the bond that could have the November and December relative low YIELD levels of 3.75% in play. If that level is violated, then the 10- year YIELD low of 3.56% becomes in play and may be correlative to the major equity index lows found in October.

Jeff Bailey

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