NASDAQ LEADERSHIP SHOULD PROLONG MARKET RALLY -- JUNIPER, JDSU, AND TELLABS BREAKOUT -- SO DOES GE -- TELECOMM LEADERS -- BIOTECH INDEX TURNS UP
NASDAQ BREAKS THROUGH 2100 RESISTANCE... The Nasdaq Composite Index finally closed decisively above the 2100 level, which represented the price peak formed at the start of 2002. Chart 1 shows that the next upside objective is just above 2300. The ability to break through that resistance barrier is a sign of continuing strength in the technology-dominated Nasdaq market. It has also allowed the Nasdaq to regain market leadership it lost a couple of months ago. Chart 2 plots a ratio of the Nasdaq divided by the S&P 500. That relative strength line started dropping in early November as the Nasdaq started to slip behind the rest of the market. The ratio line, however, has now moved into new high ground. That's a good sign for rest of the market which usually does better when the Nasdaq is leading it higher.
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JUNIPER, JDSU, AND TELLABS TOP NASDAQ GAINERS... Three of the top Nasdaq percentage gainers are shown below. All three saw strong price advances on heavy volume. Juniper Networks closed above 25 for the first time since the fourth quarter of 2001. The weekly volume was the heaviest is almost two years. JDS Uniphase and Tellabs achieved bullish breakouts on strong volume. JDS broke through the highs formed last June to reach the highest level in twenty-one months. Tellabs has broken through its previous peak formed during the fourth quarter of 2002 and has also reached the highest level in more than twenty months.
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S&P 500 OVERBOUGHT BUT STILL CLIMBING... The weekly chart of the S&P 500 shows the dilemma that often faces technical analysts. The weekly RSI has moved into overbought territory (above 70). But the market is still climbing. What to do? I'm a little concerned about overbought readings in all the major indexes. But we have little choice but to stay with the existing uptrend until it shows charts signs of reversing. The next upside target for the S&P is the early 2002 peak at 1177 (a lot of technical people are rounding that off to 1180). That's still 3.5% from Friday's levels. The weekly MACD lines are still positive. The monthly bars in Chart 6 also contain valuable information. For one thing, they show that the 1177 level is a fifty percent retracement of the 2000-2002 bear market. It also shows the value of using monthly MACD lines for longer-term perspective. Only two signals have been given over the last four years -- a sell signal at the start of 2000 (red arrow) and a buy signal earlier this year (green arrow). The fact that the monthly indicators are still trending higher explains the ability of the market to continue advancing in the face of overbought readings on the daily and weekly charts. Monthly signals override the other two. It's also worth noting that the monthly RSI is at 61 and hasn't reached overbought territory. It may get above the 70 level before the current advance finally runs out of steam.
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GENERAL ELECTRIC FINALLY TURNS UP... General Electric achieved a bullish breakout on Friday after reporting strong earnings. The sheer size of GE gave the market a needed boost. The weekly bars in Chart 8 show GE breaking through a resistance barrier in the low 30s that had contained price advances for twenty months. Not anymore. Strong volume supported the Friday breakout. The On Balance Volume line has also turned up. That means that price and volume are in sync on the upside. The relative strength line under chart shows that GE has been a market laggard. However, the GE/S&P ratio is testing a down trendline. If broken, that would signal new leadership for the market's biggest stock.
Chart 8
WEELY LEADERS AND LAGGARDS... Over the past week, the Nasdaq was the strongest of the major stock averages. That reflected new leadership in the technology sector. The Russell 2000 Index also turned in a stronger performance, reflecting relative strength in small cap stocks. New buying in both of those groups should prolong the market's current advance. Sectorwise, financials were the top sector while Materials were the weakest. We discussed yesterday why weakness in commodity prices this week hurt material stocks while helping rate-sensitive financials. Intermarket rotations were in evidence. Bonds were the strongest market followed by the dollar. The dollar rebound pushed commodities into the loss column. Among industry groups, brokers were the top group while gold was the weakest.
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TELECOM BREAKOUTS... Three of the top percentage gainers in the S&P 500 for the week are in the telecomm sector. AT&T Wireless and Sprint PCS have broken out to the highest level in nearly two years. And they've done so on very heavy volume. Lucent has reached the highest level since 2002. Its upside volume has also been impressive. Upturns in all of their relative strength lines show new interest in telecomms.
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BIOTECH BREAKOUT... The healtcare sector got a boost from a stong biotech group on Friday. The Biotech Index broke decisively through its recent highs to record a new 52-week closing high. The relative strength line along the bottom of the chart appears to be turning up. That's a good sign for the biotech group and the healthcare sector.
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DON'T LEAVE -- JUST ROTATE... Back in December, I used that phrase to resolve the dilemma of a rising market that had entered overbought territory. As a trend-follower, I couldn't justify leaving the market in the face of a continuing uptrend. However, overbought readings in all of the major stock averages suggested that the market advance had reached a fairly mature stage. Instead of leaving the market, what I was suggesting was some rotation out of leading groups into lagging groups that were showing signs of turning up. Some groups that I've mentioned since then have been Energy, Healthcare, and Telecomms. All three have done relatively well over the last month. Some rotating allows the investor to stay in the market, keep some money in market leaders, but rotate some of that money into potential new leaders that are starting to attract new money. If the market does turn down, the new leaders should hold up better than the old leaders.
