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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: Narotham Reddy who wrote (18406)	4/2/1998 8:51:00 AM
From: Narotham Reddy	Read Replies (1) \| Respond to of 70976

April May Bring Showers to Overbought Market [But very positive on AMAT, LSI Logic and Texas Instruments ] Dow Jones, April 1, 1998 By JOHN MURPHY As the Dow Jones Industrial Average moves into shouting range of 9000, the major market averages are at their most overbought levels since last summer. That suggests stocks could take a breather in April, perhaps pulling back 3% to 5% from their highs. What could prompt such a correction or consolidation? The prospect of higher oil prices. Since Saudi Arabia, Mexico and Venezuela announced they would curtail oil production, crude prices bounced back sharply from their support level at the1994 low of $14 a barrel, their most oversold level in four years (see chart 1). Since then, oil prices have given back some of their recent gains (as have some energy stocks), relieving some of the market's anxiety. Nonetheless, any further price gains in that key commodity in the weeks ahead may cause problems for stocks this spring. Chart 1 Higher Oil Prices Have a Ripple Effect If oil is indeed bottoming, we can expect to see a ripple effect through several markets. Energy shares should do better, probably at the expense of transportation stocks. Some money coming out of a nervous bond market may begin to find its way back into some commodities. The currencies of energy exporters like Great Britain and Mexico may benefit while energy importers like Japan may suffer. And any hint of higher commodity prices may speed the flow of funds toward cyclical stocks. Predictably, the rebound in oil prices spurred some buying in energy stocks. In last month's Getting Technical ("After Its Big Run, Market May Run Out of Gas", March 4), we noted that the PHLX Oil Service Index (OSX) had broken a down trendline, hitting a three-month high. That turned out to be an early sign of better times ahead in the Oil Patch. Mining shares also are showing new strength. For instance, the PHLX Gold/Silver Index (XAU) hit a five-month high last week. Renewed buying of silver near $6.00 an ounce was a big help. Cyclical Stocks Show New Signs of Life The underperformance of cyclical stocks since last October appears to be changing as well: Since they bottomed in January, cyclicals have shown better relative strength than the S&P 500. The Morgan Stanley Cyclical Index appears to be on the verge of a bullish breakout that could push it through its October peak (see chart 2). Chart 2 True, many of the consumer cyclicals like the autos, homebuilders, and retailers have been rallying for some time; the latest strength is coming from the lagging chemical, copper, paper & forest products, and steel stocks. Confirming that shift, the Morgan Stanley Consumer (Staples) Index has begun to slip relative to the broader market. Last month's Getting Technical also expressed some concern that the Philadelphia Stock Exchange's Semiconductor Index (SOX) had failed to break through some overhead resistance. But the setback that followed now may be ending. The recent decline in the SOX Index looks like what technical analysts call a "right shoulder" in a "head and shoulders" bottom (see chart 3), suggesting that those stocks are getting ready to move up. (It's important to note, however, that the SOX Index still needs to close above its February peak at 330 to confirm the bullish case.) Chart 3 Some individual stocks are already leading the SOX index higher. Just this week, Advanced Micro Devices (AMD) and Motorola (MOT) have moved up on heavy volume. AMD hit a new 1998 high, above its 200-day moving average (see chart 4); Motorola, among the group's weakest, just achieved a four-week high. Three other chip stocks that look especially promising from a technical perspective are Applied Materials (AMAT), LSI Logic (LSI) and Texas Instruments (TXN). Chart 4 U.S. Dollar May Be Near a Breakout The Dollar Index hit a three-month high this week and is once again challenging the peaks set last summer and at the start of this year. In technical terms, the price pattern since January has taken the shape of a "triangle," normally a bullish pattern. An upside breakout would put the Dollar Index at its highest level since 1989 (see chart 5). Most of the dollar's strength has come against the German mark, the Swiss franc and the Japanese yen. Chart 5 A stronger dollar could have at least one beneficial side effect: it would keep budding inflationary pressure under control. And that, of course, could help the Dow move toward 9000 again later in the year. Whether it hits or tops that magic number isn't terribly important; what does matter is that April may bring more volatility than we've seen since January. And which way the market goes will hinge very much on what happens to energy prices: They will determine how long April's showers can last -- and when this bull market will reach still higher ground. John Murphy is the author of several books on technical analysis -- most recently The Visual Investor -- and is president of MURPHYMORRIS, Inc.. His commentary is also available at murphymorris.com.