NASDAQ STILL LEADING MARKET HIGHER -- NO SIGN OF TOP YET

NASDAQ HITS NEW RECOVERY HIGH ... The Nasdaq market hit a new recovery high today and had the biggest percentage gain of the major market indexes. Chart 1 shows the Nasdaq Composite closing at 2173 which puts it within 20 points of its early 2005 high at 2191. That will be an major test for the Nasdaq and the rest of the market. That's because the Nasdaq is leading the market higher and that's usually a good thing. The Nasdaq/S&P 500 relative strength ratio has also climbed to a new six-month high. The overall market rally will continue as long as that ratio line continues to rise. Chart 2 shows why.

Chart 1

NASDAQ LEADERSHIP IS GOOD FOR THE S&P ... The next chart compares the trend of the S&P 500 (purple bars) to the Nasdaq/S&P ratio (green line). If you examine the chart over the last three years, you'll see that upturns in the ratio line (Nasdaq leadership) has always coincided with gains in the S&P 500. The two previous examples occurred in the fourth quarter of 2002 (first green arrow) and last summer (second green arrow). The two peaks in the ratio at the start of 2004 (first red arrow) and the end of 2005 (second red arrow) coincided with pullbacks in the S&P. The third green arrow shows that the ratio last bottomed at the beginning of May and is still rising. That's just another way of saying that the Nasdaq has been leading the S&P 500 higher since then. One way to tell if and when the S&P 500 rally is nearing an end is to follow the Nasdaq market and the Nasdaq/S&P 500 ratio. Right now both are rising. As long as they keep rising, odds favor a higher market.

Chart 2