MARKET RALLIES ON FED INACTION -- NASDAQ REGAINS ITS 200-DAY LINE -- ORACLE BOOSTS SOFTWARE HOLDERS

FED HOLDS RATES STEADY... To no one's surpise, the Fed left short-term rates unchanged today. The combination of falling commodity prices, lower inflation numbers, and the threat from a weak housing sector made another rate hike highly unlikely. The market was rallying into the news and stayed firm afterwards. In other words, there were no surprises. While the major stock indexes (like the Dow and the S&P 500) are in the process of challenging their May highs, the Nasdaq market recovered from yesterday's brief dip. That's good news because it kept the Nasdaq on top of its 200-day average. Yesterday's Yahoo-inspired dip threatened to push the tech-dominated market back below its 200-day average. Fortunately, it didn't happen. In fact, Chart 1 shows the Nasdaq Composite Index hitting a new four-month high. The big technology star today was Oracle, which saw a 12% gain. That also gave a big boost to the software group.

Chart 1

SOFTWARE HOLDERS HIT FIVE-YEAR HIGH ... Back on August 15, I highlighted the Software Holders (SWH) because of its strong chart action and signs that it was starting to act as a market leader. At the time the stock was breaking through its summer high (green circle) and moving above its 200-day moving average. At the same time, its relative strength ratio was turning up as well. The stocks that were leading it higher at the time were Adobe, Computer Associates, and Microsoft. Oracle was the leader today.

Chart 2

RISING DOLLAR IS STARTING TO HURT FOREIGN ETFS ... One of the things that may have gone unnoticed during the recent market rally is that the U.S. market has doing much better than foreign stocks. Part of the reason for that may be due to a firmer dollar. At least that's the message I get from the next chart. The green bars in Chart 3 represent the U.S. Dollar Index (the dollar versus a basket of foreign currencies). The USD bottomed in May has been firming since then. The blue line is a ratio of the EAFE ETF divided by the S&P 500. When the blue is rising, foreign ETFs are outperforming the S&P 500. That had been the case from last December to this May when the dollar was falling. The EFA/S&P ratio has been dropping since May as the dollar has been rising. That means that foreign ETFs have been lagging behind the U.S. market. In fact, as Chart 4 shows, the same is true for foreign markets in general.

Chart 3

Chart 4