Again and again we are seeing many high-ranked leaders pull back after having enjoyed impressive gains in the rally that started in mid-March.  The only encouraging thing that can be said of the recent market weakness is that, for the most part, there has not been heavy volume behind the recent declines.  Still, your best bet is to keep a close eye on individual stocks and evaluate them on a case-by-case basis.  Realize that the overall market isn't being very helpful right now, and as such, be more skeptical until broader strength returns.

Across the board, you should certainly be noticing many frequent references to stocks and indices moving to or through their 50-day moving average lines.  Most of you should recognize the importance of watching the action of stocks as they trade in the range of their 50-day lines.  Of course, in a healthy acting stock, you'll normally see it find support near its 50-day line.  This is where institutional investors (large investors who may already own an interest in the issue) are often inclined to step up and buy more of a stock, assuming they still have an optimistic outlook for the company's shares.

That may not always be the case, however, and when you see a stock slice under its 50-day line on heavy volume, your normal reflexes should prompt you to sell.  Mind you, this is not an exact science, but still a very important guideline to follow.  There will be occasional cases when stocks slip quietly under their 50-day lines on light volume, violating it for a day or two.  If you decide to hold a stock that has dropped under its 50-day line more casually, be looking for it to quickly repair the damage with heavy volume lifting the shares back over the 50-day line.  Don't give it more than a day or two, and never make excuses for holding a stock as it persists in trading under its 50-day line day after day and/or if it sinks more substantially in price. You would probably be wiser to sell, and later if it shows renewed strength and starts looking good again you can always buy it back with the reassurance that higher volume buying demand is behind it.

Below we are going to take a look at the condition of the major averages and several important parts of the bigger picture.  The purpose of this is to study the action in some specific groups that are important to the overall market.  This helps us see what is happening beneath the surface, and what is causing the action in the major averages.  It also gives us some clues as to how we might be wisest to handle individual stocks within each of these groups. 

The S&P 500 Index Remains Under its 50-day Moving Average
The chart of the S&P 500 Index below shows a break of its 50-day moving average (the blue line).  Regular readers of CANSLIM.net's Market Commentary will recall that after it reversed from its highs on Thursday, July 31st, the bellwether S&P 500 Index quietly slipped under this important short-term moving average last Friday, August 1st.  Note that these were some early hints at the market rally's deterioration, while the past week's action has brought more evidence of that.  Recent closes for the S&P 500 have been below the June-July low closes, while the intra-day low on Wednesday, August 6th exceeded the July 1st intra-day low.  One thing missing from the picture of late, though, has been above average volume on the down days.  Sure, that helps the case that this is only normal consolidation and not heavy distributional selling activity, but these signs of deterioration are not to be ignored.  Obviously, higher volume on the downside can easily bring with it a lot more technical damage.  Recall also that our August 2003 issue of CANSLIM.net News cover story cited the more meaningful support that may be found at the December '02 highs (not shown).

Dow Jones Industrial Average - Better, but No Volume on Bounce
The Dow Industrials have managed to make a little bit better stand thus far.  They rallied to a close back above their 50-day line on Friday, but volume was well below average.  Of course, CANSLIM fans are not likely to care very much about the stocks making up the Dow Jones Industrial Average, since they are all far from our usual purchase guidelines.  Still, the lack of meaningful progress over the past two months is a concern because the sentiment of investors is influenced by this widely quoted and recognized gauge of the equities market.

Nasdaq Under 50-Day Line - Still Above June-July Lows
The tech-heavy Nasdaq has obviously enjoyed a more substantial rise in the past 5 months, but in the past week it too slumped under its 50-day moving average line.  It is still above its June-July lows (see green line at 1,600).  Of course, the Nasdaq is a very broad index, and it is influenced a lot by the action in the tech sector, particularly the Semiconductor group. 

Semiconductor Index (SOX) Breaks 5-Month Upward Trend Line
The Semiconductor Index closed out a rough week by breaking under a better than 5-month upward trend line (see green line) and closing under its 50-day moving average (at 381).  The June lows (see orange line) may be the SOX's next important support level, while a break under them could spell even more serious trouble ahead, not just for semiconductor stocks, but for Nasdaq and the broader market as well. 

Internet Index -  Signs of Failing Leadership
There have been a lot of big gains in the internet sector thus far this year, and presently three of the top four groups listed in Investor's Business Daily's 197 Industry Groups hail from the Internet sector.  Notice a gap down on the chart occurred last Wednesday, as the June-July lows were also violated.  The chart also has the look of a bearish head-and-shoulders pattern, which makes the recent breakdown look even more treacherous.  In many cases where there have been several-fold price increases in generally low-priced stocks in the group, sharp waves of profit taking have been occurring, and this breakdown may mark the end of the groups' leadership role for a while.

Networking Group Unable to Rally Above 50-Day Line
The Networking Index sliced under its 50-day moving average earlier in July, and the chart look like it is rolling over.  On the rebound it was turned back at its 50-day line and could not make headway. 

Financials Thus Far are Making a Good Stand
We've often mentioned the important impact the financial stocks have on the overall market.  If there is any hope for the rally's recovery and sustainability, we'd expect the financial stocks to play a key role.  Technical analysts, including the famous John Murphy, have emphasized the financial groups' importance many times, especially of late.  Below are charts of the Broker/Dealer index, NYSE Financial Index, and the Bank Index.  Of the three, the Broker/Dealers are looking strongest as they recently made a stand at their 50-day line.  Meanwhile, the NYSE Financials and Bank Index are trying to dig their heels in and make a stand at the June-July lows.  The outlook for higher interest rates is certainly having an effect on these groups as well.

Heathcare Group Breaking Down Sharply
Heath services stocks took a rough beating in the past week, including many HMOs which had been providing leadership.  As the group dove lower there was simply no hesitation at the 50-day line or prior lows that may have offered some support, but there was a little improvement late last week.  The breakdown in this group, however, is likely to mean that for the time being the group will at the very least need to spend more time consolidating.  This leaves us looking to other areas for market leadership.

Biotech Index Nears June-July Lows
The group topped in early-June and bounced off its 50-day line in early-July.  Notice that the Biotech Index broke under its 50-day line on August 1st along with numerous other charts on the same day.  Biotech stocks are approaching a level where they may find support near prior lows, and immediate improvement is important to see here.

Retail Index Showing Exceptional Strength
Retail stocks are showing good strength.  The Retail Index made a stand at its 50-day line, and in recent weeks there have been an increasing number of issues in the group making new 52-week highs.  We mentioned this point in the cover story of the August 2003 issue of CANSLIM.net News, where we also listed numerous stocks in the group that are among the better looking candidates.

Oil Services Group Gets a Bounce
The Oil Services Index gave back all of its gains from a steep rise May, but seems to have found support above its earlier lows.  Last Thursday's sharp increase helped it break above a steep downward trend line.  Assuming that could lead the way to more improvement, we will be watching the group for more improvement.  Still, if you scan down IBD's 197 Industry Groups, you won't find any oil and gas groups listed near the top. The first one you'll notice is the Oil & Gas US Exploration & Production group, which is ranked 87th.

Gold & Silver Index Breaks Out
As the market has recently run into trouble, it is no surprise to see the classic safe-haven group exhibiting strength. In the event of a more serious downturn in the equities market, we would expect that this defensive group is one area that is most likely to benefit. 

CONCLUSION:
Maybe the market will be inspired to hold its ground, and we might not see the critical June-July lows violated on many of the charts. However, given the recent action, the substantial gains achieved since March, and historic precedent that says we are coming into a time of year when the market has often had trouble, there are enough warning flags flying to warrant caution.  We'd certainly wait to see renewed conviction on the buy side before embarking on any aggressive buying. 

Still, we realize that since the rally began, the market has been rather unwilling to budge very much on the downside.  Some of the recent leaders are also hanging in there, not failing badly.  And plenty of sidelined cash remains ready to flow into the market.  So, if there is renewed strength and an increase in high-ranked stocks breaking 52-week highs, we will notice. 

In cases that warrant a closer look or immediate action, CANSLIM.net's experts will post brief Stock Bulletins, or more detailed Stock Alert Reports.  As a subscriber, you don't have to do anything but sit back and wait, and you'll receive links to these reports via email immediately as they are published.

Kenneth J. Gruneisen - A Registered Investment Advisor & Registered Principal, Ken manages a Source Capital Group (Member NASD,SIPC) branch office and offers personalized assistance. Investors with a significant financial interest in equities may inquire about opening an account by calling 1-888-237-8399 or emailing to kgruneisen@sourcegrp.com Comments contained in the body of this report are technical opinions only and are not necessarily those of Source Capital Group, Inc. The material herein has been obtained from sources believed to be reliable and accurate, however, its accuracy and completeness cannot be guaranteed. Our firm, employees, and customers may effect transactions, including transactions contrary to any recommendation herein, or have positions in the securities mentioned herein or options with respect thereto. Any recommendation contained in this report may not be suitable for all investors and it is not to be deemed an offer or solicitation on our part with respect to the purchase or sale of any securities. Source Capital Group, Inc. is a NASD/SIPC member firm. Further information is always available upon request. If you know anyone that may have an interest in receiving this or any of our other reports, please call our office locally at (954) 785-1990 or (888) 237-8399 or email kgruneisen@sourcegrp.com