MICROSOFT HAS BECOME A NEW MARKET LEADER -- THE NASDAQ LOOKS CHEAP RELATIVE TO THE S&P 500 -- 2007 LEADERS STILL INCLUDE FOREIGN STOCKS
MICROSOFT RELATIVE STRENGTH LINE TURNS UP... Last night I showed Microsoft breaking out to a six-year high. After a bullish report, the stock is soaring another 10% today. One of our readers reacted to last night's chart with the observation that Microsoft's upside breakout hardly qualified the stock as a "major winner over recent years". The reader is correct. Except that he (or she) missed my point. Microsoft hasn't been a market leader over the past years (nor has technology). The main point is that Microsoft is becoming a "new" market leader (along with technology). The monthly bars in Chart 1 show MSFT trading over 35 for the first time since mid-2000. The stock is still 15 points (or 45%) from its 2000 peak over 51. For my purposes here, the more important line is the ratio of MSFT divided by the S&P 500 which is shown in Chart 2. The RS line has just hit a new four-year high. More importantly, it's just broken a down trendline line extending back to 2000. That makes Microsoft a "new" market leader. Which is better than an "old" market leader.
Chart 1
Chart 2
NASDAQ APPEARS UNDERVALUED RELATIVE TO S&P 500 ... There may be several reasons why the technology-dominated Nasdaq market has become a market leader this year. One may be the rotation to large cap stocks like Microsoft. Technoloy is also sensitive to growth in foreign markets -- especially Asia. Technology also does especially well after the Fed starts easing. Another reason may simply have to do with relative valuation. Chart 3 is a ratio of the Nasdaq Composite divided by the S&P 500. That relative strength ratio bottomed in late 2002 and rallied throughout 2003. That showed technology leadership as the market bottomed four years ago. The ratio peaked, however, in early 2004 and dropped into the middle of 2006. That showed technology underperformed for those two and half years. Technology has done much better since then. In fact, the ratio has just exceeded its 2006 peak and broken a three and half year down trendline in the process. To make the case for Nasdaq undervaluation more compelling, Chart 4 shows the Nasdaq/S&P ratio since 1999. Chart 4 shows the ratio nearing a new six-year high. That's still a long ways from the highs hit in 2000. That chart alone seems to argue that the Nasdaq market presents much better value at the moment than the rest of the market.
Chart 3
Chart 4
MARKET LEADERS FOR 2007... I always advocate sticking with market sectors and industry groups that show market leadership. Chart 5 shows six such groups since the start of 2007. In order of relative strength, those six leaders include energy, basic materials (including precious metals), technology, industrials, utilities, and consumer staples. All are doing better than the S&P 500 (not shown here). Those are groups that I'd recommended concentrating your capital on. Groups that I'd be avoiding are financials, homebuilders, REITs, retailers, and semiconductors.
Chart 5
FOREIGN MARKETS STILL LEAD THE US ... Three side efffects of a falling dollar are stronger action by large caps, rising commodity prices, and stronger performance by foreign stocks. Large caps are certainly doing better than small caps. In today's trading, oil hit a record high, gold a 27 year high, and soybeans a three-year high. Chart 6 compares the EAFE iShares (EFA) to the S&P 500 (flat line) since the start of the year. [EAFE stands for Europe Australasia and the Far East]. Since the start of 2007, the EFA has outperformed the S&P by a margin of 7.8%. Judging from the direction of the blue line, there's no sign of that trend ending. Rising commodities are helping emerging markets do even better, especially in Latin America (and Brazil in particular). Rising commodities and stronger local currencies are also helping developed markets in Australia and Canada. Asian markets (ex-Japan) are also world leaders -- especially Hong Kong, Singapore, and South Korea.
Chart 6
