JULY DROP IN CORE PPI STRENGTHENS BONDS AND STOCKS -- SOFTWARE AND CHIPS HELP PULL NASDAQ OVER 50-DAY AVERAGE
WEAK PPI BOOSTS BONDS AND STOCKS... Core inflation at the producer level fell unexpectedly during July. Since inflation is the most closely watched figure these days (because of its impact on Fed decision-making), bonds and stocks rallied on the news. The dollar dropped. For the first time in awhile, today's upside leadership came from the beaten-down technology sector. Although a 3.7% gain in semiconductor stocks attracted the most attention, a much stronger performance has been turned in by the software group. In fact, software has been one of the market's strongest groups over the last week. Chart 1 shows the Software Holders (SWH) climbing above its summer high in today's trading. It's nearing a challenge of its 200-day moving average. Its relative strength line went from a market laggard to a market leader in late July and has risen to a new three-month high. Although Microsoft has been rising of late, most of the credit for today's upside breakout comes from Adobe, CA, and Oracle.
Chart 1
ADOBE AND CA HAVE STRONG DAYS ... Charts 2 and 3 show strong gains in two of the bigger components in the Software Holders. Adobe has risen to a new three-month high and is nearing a test of its 200-day average. Its relative strength line has been rising since late April. Chart 3 shows CA gapping higher on very strong volume. The real leader of the software group is Oracle. Chart 4 shows the stock climbing to a new 52-week high. Its longer-term chart is even more impressive.
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ORACLE REACHES NEW FOUR-YEAR HIGH ... The weekly bars in Chart 5 paint a positive picture. They show Oracle trading above its early 2004 peak at 15.51 for the first time in four years. That's strong chart action. Its relative strength line, which had been dropping for more than three years, turned up during the spring of this year and is still climbing. That makes Oracle a market leader. The monthly bars in Chart 6 give an even longer-range perspective. They show a pattern of rising peaks and troughs since early 2002 and a stock that has gone from a market laggard to a market leader. And it's a long way from its 2000 peak at 45. If you're looking to nibble on a leading group in the technology sector, the Software Holders look like a strong candidate to do that. If you're looking for the strongest stock in the group, my choice would be Oracle.
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OVERSOLD SOX BOUNCES OFF CHART SUPPORT ... Back on July 28, I showed the Semiconductor (SOX) Index in the most oversold condition in two years and starting to bounce off long-term chart support at its early 2005 low. I wrote at the time that a bounce from that level would be necessary to support a Nasdaq bounce. We're seeing some signs of that new leadership today by the SOX. The weekly bars show the SOX climbing over its 10-week moving average for the first time in three months. The longer-term trend of the SOX is still down. But it's entitled to an oversold bounce. And it appears to be starting one.
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SEMICONDUCTOR HOLDERS CLEAR 50-DAY LINE ... The next chart shows the Semiconductor Holders (SMH) trading over their 50-day average for the first time since early May. And they're doing so on rising volume. Three of the SMH leaders are shown below it. Micron Technology is climbing on strong volume. Novellus is approaching a four-month high and is also trading over its 200-day average. Texas Instruments has just exceeded its 200-day line. Its relative strength line shows it outperforming the S&P 500 over the last month. Semiconductor strength is giving a big boost to the Nasdaq Composite Index which closed over its 50-day average for the first time in three months and it did so on rising volume. Chart 12 shows the Nasdaq 100 Trust Shares (QQQQ) doing the same. Its daily MACD lines are at the strongest level in three months. That doesn't turn the longer-term Nasdaq chart bullish. But it does suggest a short- to intermediate-term rally attempt.
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