OIL SURGES 5% TO BOOST ENERGY SECTOR -- PLUNGING BOND YIELDS SUPPORT MARKET RALLY LED BY RATE-SENSITIVE SHARES -- NASDAQ INDEXES REACH INITIAL TARGETS

CRUDE OIL SURGES 5% ... After surviving a recent test of its 200-day moving average, crude oil surged $2.63 (5%) today. That puts the key commodity back over its 50-day average, its early May high, and breaks a two-month down trendline. That strong price action puts crude in position to test its 2005 high near at $58 and made energy the day's strongest sector. Charts 2 and 3 show the Energy Sector SPDR (XLE) and the Oil Service Holders (OIH) having surpassed their 50-day averages and their May highs. Energy is starting to exert market leadership again. That's generally not a good thing for the stock market if it continues over a longer period of time.

Chart 1

Chart 2

Chart 3

PLUNGE IN BOND YIELDS BOOSTS RATE-SENSITIVE STOCKS... Bond yields plunged to the lowest level in a year today. That was bullish for bond prices and stocks tied to interest rates. Two of the biggest gainers were housing and REITs. Last week I suggested that holders of housing stocks keep a close eye on bond yields as they tested 4%. Today's drop in yields well below the 4% threshold, however, has removed some of the short-term risks in that area. The PHLX Housing Index is moving up to test its early March high, while the Morgan Stanley REIT Index is nearing a test of its recent high. Falling bond yields should prolong rallies in both groups. Utilities also benefited from falling rates. Chart 6 shows the Utilities Sector SPDR (XLU) hitting a new high today. Financial stocks also had a relatively good day.

Chart 4

Chart 5

Chart 6

NASDAQ INDEXES REACH INITIAL TARGETS ... Both Nasdaq indexes are at or very close to initial upside targets. The Nasdaq 100 has reached its mid-February peak at 1561, while the Nasdaq Composite came within 5 points of its early March high at 2100. Since the Nasdaq has been leading the rest of the market higher, what it does at those initial resistance levels should determine if the market is in need of a pause or a pullback. Even if a pullback does occur, the current technical condition of the market is a lot stronger than it was a couple of months ago. It now looks like the major averages are capable of eventually retesting their 2005 highs. A tug of war is going on beneath the market's surface. Rising oil prices are bad, while falling interest rates are good. In the long run, higher oil prices might hurt. Over the short-run, however, I suspect that lower rates will support further market advances.

Chart 7

Chart 8