PLUNGE IN WHOLESALE INFLATION BOOSTS BONDS AND STOCKS -- CHIPS AND RETAILERS LEAD MARKET TO NEW HIGHS -- HOME DEPOT TURNAROUND LIFTS RETAIL HOLDERS -- CONSUMER DISCRETIONARY SPDR REACHES NEW RECORD -- FALLING RATES BOOST HOMEBUILDERS

BIG DROP IN PPI HELDS BONDS AND BUILDERS... The biggest drop in core wholesale inflation in thirteen years had a beneficial effect on bonds and stocks today. [The only group that lost ground was basic materials which are tied to commodity prices like copper which have been falling]. The huge drop in wholesale inflation increased the odds for Fed easing early in 2007 and pushed bond yields sharply lower. [That means that bond prices rose]. Chart 1 shows the 10-year Treasury Note yield testing its recent lows. The drop in rates gave a big boost to consumer discretionary stocks which include retailers and homebuilders. As a result, the Consumer Discretionary SPDR (XLY) hit a record high today (Chart 2). Four of the top five percentage gainers in the XLY were homebuilders. Chart 3 shows DR Horton surging to a one-month high on huge volume. Since housing has been one of the biggest drags on consumer spending, today's action gave a big boost to home improvement stocks like Home Depot.

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BIG TURNAROUND IN HOME DEPOT... Home Depot scored an impressive upside reversal today and helped spark a late rally in the broader stock market. The daily bars show the home improvement stock opening lower and closing sharply higher. And it did so on massive volume. That's bullish action. The stock is now challenging its 200-day moving average for the first time in six months. Because of its large size, the rally in Home Depot (and a bounce in Wal Mart) gave a boost to Retail Holders (RTH). Chart 5 shows the RTH bouncing off its 50-day moving average. Its relative strength ratio, which had been declining for two months, is bouncing off chart support at its August low. HD and WMT were two of the Dow's strongest stocks today. [A bounce in drug stocks also supported the Dow rally]. The Dow percentage leader, however, was Intel. Which brings us back to the semiconductor group which achieved a bullish breakout today.

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SEMICONDUCTOR INDEX AND HOLDERS EXCEED 200-DAY AVERAGE ... The bellwether of the semiconductor group -- Intel -- surged more than 4% today on heavy volume and scored the highest close in ten months. Chart 6 shows a couple of other bullish developments. One is the stock bouncing off its 50-day moving average. The other is the 50-day (blue) line crossing over its 200-day (red) line a month ago. That's bullish action. That had a positive effect on Semiconductor Holders (SMH) which closed above their 200-day line today on rising volume. [Intel is the biggest holding in the SMH]. I wrote last night that the Semiconductor (SOX) Index appeared ready to clear its 200-day average. Chart 8 shows it doing that today. The relative strenth ratios for the chip group are starting to rise as well. That gave another boost to the Nasdaq market which broke out earlier this week and continues to lead the rest of the market to new highs.

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NEW HIGHS ON RISING VOLUME ... The final result of a low inflation number, falling bond yields, and rising retail and technology stocks was a strong stock market day. All of the major stock indexes hit new recovery highs. And they all did it on rising volume. The next three charts show them in order of today's relative strength (based on percentage gains). The leader once again was the Nasdaq 100 Shares (QQQQ) which hit a new five-year high (Chart 9). Initial support is now raised to last week's low at 41.61. Chart 10 shows the Dow Diamonds (DIA) hitting a new record. Initial support is now at 119.60. Chart 11 shows the S&P 500 SPDRs (SPY) reaching a new six-year high. Initial support there is at 135.62. Small caps did even better than large caps today. Chart 12 is a point & figure chart of the S&P 600 Small Cap Index. It shows that small cap index in a p&f uptrend and nearing a challenge of its May high at 404.

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