MARKET TAKES TURN FOR THE BETTER -- FINANCIALS, RETAILERS, AND TECHS LEAD MARKET HIGHER -- MAJOR INDEXES EXCEED MOVING AVERAGES

SECTOR ROTATIONS TURN POSITIVE ... Over the last couple of days, I've been writing about sector rotations that normally take place in a market upturn that's often accompanied by falling energy prices. Earlier in the week I wrote about how semiconductors were leading the technology-dominated Nasdaq market higher, which is good for the rest of the market. Yesterday, I explained that financials and retailers also have a history of leading the market higher after energy prices peak. Interestingly, the three top market industry groups over the past week have been semiconductors, banks, and retailers. That's a positive sign for the market as a whole. Chart 1 shows the Bank Index climbing back over its 200-day average and breaking a five-month down trendline. Today's benign inflation report (and falling oil prices) are giving a big boost to rate-sensitive stock groups. Bond yields are falling while homebuilders and REITs are very strong. Chart 2 shows the Retail Holders (RTH) jumping sharply over both moving average lines this week. Their relative strength ratio has also turned up. Along with technology stocks, these are the types of stocks that usually lead a market advance.

Chart 1

Chart 2

NASDAQ 100 TURNS UP ... On Tuesday I showed the Nasdaq 100 Shares (QQQQ) breaking a five-month down trendline and challenging their 200-day moving average. They've broken through that important resistance line. I also pointed out that an upturn in the QQQQ/SPX ratio was a good sign for the market since the Nasdaq usually led the market higher at bottoms. It looks like the rest of the market is following the Nasdaq higher.

Chart 3

DOW AND S&P 500 CLEAR MOVING AVERAGE LINES... The improvement in the broader market is seen on the next two charts. The S&P 500 is trading back over its 50-day average for the first time in two months. The Dow has climbed back over its 200-day moving average (as well as its 50-day line). Impressive as the price action has been over the last couple of days, the one thing missing has been a noticeable pickup in volume. That's a necessary ingredient in a major market upturn. For now, however, we have to respect the strong price action. This isn't a time to fight the tape. It's also not a time to be short the market or to be holding onto a bear market fund. [My May 4 message recommended reducing shorts and bear market positions (May 04, 2005)]. It may even be time to put some money back into the market. That's especially true of the groups mentioned above that are leading the advance.

Chart 4

Chart 5