RECENT STOCK BREAKOUTS INCLUDE FORMER LAGGARDS LIKE IBM, MMM, AND KLA TENCOR -- VERIZON MAY BE NEXT -- OVERBOUGHT MARKET COULD SUCCUMB TO SOME MAY SELLING

IBM IS BREAKING OUT ... IBM was one of the new Dow leaders that we showed last week. I'm coming back to it today because the Big Blue has broken through its early 2007 highs near 100 (Chart 1). The recent jump in its relative strength line shows its sudden change in fortune from a market laggard to a new leader. The monthly bars in Chart 2 show that IBM has exceeded its early 2004 peak near 98, and is now trading over 100 for the first time in five years. The IBM/S&P 500 ratio in Chart 2 has just broken a five-year resistance line. That's another sign that Big Blue is starting to look more like a leader than a laggard. 3M is another new Dow leader that's achieving a bullish breakout

Chart 1

Chart 2

3M REACHES NEW 52-WEEK HIGH ... 3M is another one of last week's Dow leaders that's achieving a bullish breakout. The daily bars in Chart 3 show the stock climbing above its fourth quarter high at 81.44. That puts the stock at a new 52-week high and headed for a test of its all-time high near 86. Its relative strength ratio is breaking out as well.

Chart 3

VERIZON NEARS UPSIDE BREAKOUT ... Verizon is another Dow stock that may be on the verge of a bullish breakout. The daily bars in Chart 4 show the big telecom stock testing its 2007 highs around 38. The weekly bars in Chart 5 paint a much more positive picture. They show Verizon having already exceeded its 2003-2004 highs ranging from 36.30 to 36.92. A new 2007 high would put the stock at a new five-year high. The stock's relative strength ratio in Chart 5 broke a three-year resistance line a year ago and has been outperforming the S&P 500 since then. That's consistent with superior performance in the telecom sector since last summer. Keep VZ on your watchlist for a possible upside breakout.

Chart 4

Chart 5

KLA-TENCOR SHOWS NEW NASDAQ LEADERSHIP ... The Dow isn't the only stock index that's benefiting from new signs of leadership from former laggards. So is the Nasdaq 100 which is being helped by new strength in KLA Tencor. That stock is on the list of semiconductor stocks that are starting to achieve bullish breakouts. The weekly bars in Chart 6 show KLAC trading over 55 for the first time in three years. Once again, the stock's RS line shows a former Nasdaq laggard turning into a potential new leader. The KLAC/Nasdaq ratio (solid line) broke a three-year resistance line at the start of 2007 and continues to climb. That action is consistent with new signs of superior performance in the chip group, especially after last week's bullish breakout in the Semiconductor Index.

Chart 6

OVERBOUGHT MARKET MAY SUCCUMB TO SOME MAY SELLING ... I got a call from CNBC today inviting me to take part in a segment about the "sell in May and go away" principle. I declined the interview as I usually do these days. But it got me thinking that some nervous investors (or short-term traders) may start to do some selling in an anticipation of a possible May pullback. That's exactly what happened last May. Adding to those concerns is that fact that the market is in a short-term overbought condition. That can be seen by the 14-day RSI line rising above 70 for the S&P 500 in Chart 7. Some type of pullback from current levels would be pretty normal at this time of year. The question, however, is always how far down could a pullback go. Chart 7 offers us to ways to tell. One is the the February intra-day peak at 1461. That should act as support on a short-term pullback. Another line to watch is the 20-day average (green line) which is ending at 1463 today. That's usually the first line of defense in an overbought market. It's also quite possible that money managers are starting to rotate out of some former stock leaders and moving into former stock laggards. That may explain some of the new stock favorites that we've been writing about recently.

Chart 7

VIX STARTS TO CLIMB ... Another short-term cause for concern is today's jump in the CBOE Volatility (VIX) Index. That's because the VIX trends in the opposite direction of the market. The VIX has been dropping since early March when the lastest market upleg began. The daily bars in Chart 8 show the VIX reaching a four-week high today and breaking its resistance line. The daily MACD lines, which have been negative for two months, turned positive today (red arrow). A rising VIX is usually a warning that the market is vulnerable to some selling.

Chart 8