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Divergence In the Equity and Currency Markets

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The three major averages are trading well off their intraday highs, following a rollover that began around the time President Bush was giving his speech in Arkansas. The Dow powered ahead to a new relative high today but seems to be struggling with psychological resistance at 8600. Meanwhile, the NASDAQ tried unsuccessfully to move above its December high of 1521. Those levels are likely to keep a lid on any late-session rally attempt by the bulls.

As pointed out in the Market Monitor, the U.S. Dollar index (DX00Y) is continuing its losing streak today. Five consecutive sessions of new multi-year lows have taken the currency to levels not seen since the first quarter of 1999. To put it all in perspective, the next region of technical support for the dollar index is the October 1998 lows in the $91-$93 region. Those lows came amid an atmosphere of market panic that was precipitated by a triple-whammy of the collapsing Asian markets, the devaluation of the Russian Ruble, and the spectacular failure (and subsequent bailout) of the Long-term Capital hedge fund. Today's global investing climate is also plagued by a good deal of trepidation, but now that the war in Iraq is over it's hard to point to a particular catalyst for the sell-off in the Dollar. In any event, the divergence between the Greenback and the major indexes probably can't last much longer. Further declines in the currency will make it harder for foreign investors to justify investments in the U.S markets.

Sector leaders today include the semiconductors (SOX.X, +2.0%), health providers (HMO.X, +2.3%) and networkers (NWX.X, +4.4%) - the latter of which Jeff discussed in his 1:00 update. The HMO.X has soared to new multi-month highs after Oxford Health (OHP) reported blowout earnings and upside guidance.

Today's gains in the SOX are technically significant because the index has powered above resistance at 350.

Annotated daily chart - SOX.X:

See that retracement bracket from the October lows to the December highs? There's been some definite correlation with those Fibonacci levels, with the SOX most recently finding resistance/support at the 38% retracement. It'll be interesting to see whether the index can power through the 19% level near 358. A move through that region might set the stage for a retest of the December highs.

The market internals are showing another day of brisk volume, with 1.4 billion shares already traded on the NASDAQ and 1.2 billion on the Big Board. Advancers are beating decliners by a small margin, while 52-week highs continue to swamp 52-week highs on both markets.

Kent Barton

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