SIGNS OF INFLATION PUSH BOND YIELDS TO EIGHT MONTH HIGH -- SOX HITS SIX MONTH LOW AS TECHS LEAD MARKET SELLOFF -- CONSUMER STAPLES GAIN GROUND -- NASDAQ HEADING FOR RETEST OF 200-DAY AVERAGE

GDP REPORT REVEALS SOME INFLATION ... The first quarter GDP report came in at 4.2% which was a little less than expected. What was more notable was a jump in inflation. The personal consumption expenditure price index (which Mr. Greenspan is known to watch) rose 3.2%, which was the fastest jump in three years. The labor cost index also came in higher than expected. Those signs of inflation pushed bond yields higher again today, which kept pressure on the stock market. Chart 1 shows the 10-year T-note yield jumping to 4.60% today. Chart 2 shows that bond yields are now at the highest level in early eight months -- and within striking distance of the highs of last summer. Needless to say, any move above last year's highs would confirm that long-term rates are headed higher.

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SOX HITS NEW LOW... The chart of the Semiconductor (SOX) Index got even worse today. The SOX had just recently fallen under its 200-day average for the first time in a year. Today's drop pushed it to the lowest level since last October. Its relative strength line, which started dropping during January, also hit a new low today. I recently commented that it was very difficult for the Nasdaq (and the market in general) to mount any kind of meaningful rally with the SOX under pressure. In my view, the SOX breakdown is putting a lot of downside pressure on the entire market.

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BIG SOX LOSERS... A glance at the next three big chip stocks show where most of the damage is being done, and paints a very weak picture for the group. Although all look pretty bad, the weakest is KLA Tencor which broke its 200-day line almost two months ago. Texas Instruments broke that long-term support line today in pretty decisive fashion.

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SELLING TECHS, BUYING STAPLES... A glance at some of the best and worst S&P performers today tells a lot about where the money is leaving and where it's going. JDSU Juniphase was the biggest percentage loser in the S&P today. Its daily chart shows JDSU falling under its 200-day average and tumbling to the lowest level in four months. Some of the money coming out of the weakest part of the market is moving toward defensive consumer staples. Two of the day's top S&P 500 gainers were Coca Cola Enterprises and Gillette. Both stocks erupted to four-year highs on heavy volume. [Please see midday message for a look at their long-term charts).

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STAPLES VS. THE SOX... One of the best ways to spot sector rotations is with ratio analysis. And that's what we're doing in the next two charts. Chart 10 plots a ratio of the Consumer Staples ETF divided by the S&P 500. It bottomed during January and is now hitting a new high. Chart 11 plots a SOX/S&P ratio over the same time span. It peaked during January and hit a new low today. Notice that the move into consumer staples started just as the SOX started to slip. Relative weakness in technology stocks (like the SOX) is a negative sign for the market. Relative strength by consumer staples is a sign that investors are turning more defensive. Judging from recent market action, the sector rotators got it right again.

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NASDAQ LEADS MARKET LOWER... As has been the case since the start of the new year, the Nasdaq market is once again leading the rest of the market lower. After falling back under its 50-day average yesterday, it undercut its April low today on rising volume. It's bearing down again on its 200-day moving average. A bounce off that long-term support line during March prevented a more serious market downturn and led to a short-term bounce which may be ending. The next retest of the 200-day line will be another important test for the Nasdaq and the rest of the market. The Nasdaq/S&P 500 ratio bounced a bit over the last month, but not enough to sustain a market rally. Now it's falling again. In a bad market day, all the major stock indexes traded under their 50-day lines and their April lows. Short-term trends have turned down again.

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