MARKET BREAKS THROUGH CHART BARRIER -- UPSIDE LEADERSHIP COMES FROM SMALL CAPS, FINANCIALS, HOMEBUILDERS, AND ENERGY -- PROSPECTS LOOK BETTER FOR YEAREND RALLY

S&P 500 BREAKS THROUGH CHART SUPPORT ... Earlier today, I wrote about the more positive tone of the market with new signs of strength in small caps and financials. By day's end, those two groups (along with homebuilders and energy) helped the S&P 500 (and other market indexes) break through moving average and chart resistance and improve its short-term outlook. The "hourly" bars in Chart 1 show the S&P 500 closing well above its mid-November peak at 1492. The "daily" bars in Chart 2 show the S&P also closing back over its 50- and 200-day moving averages. Although volume was on the light side, big board breadth was positive by a 4 to 1 ratio. Chart 3 shows the Short S&P 500 ProShares Fund (SH) breaking chart and moving average support near 60 on heavy volume. That suggests it's time to lighten up on short positions.

Chart 1

Chart 2

Chart 3

LAGGARDS LEAD TODAY'S RALLY ... The S&P 500 rose 1.5% today. By contrast, the Russell 2000 rose 2.78% and the Financials Select SPDR +2.8%. The ability of those former laggards to show upside leadership for a change gave a big boost to the market. Chart 4 shows Russell 2000 iShares climbing to new high for the month and on rising volume. Its relative strength ratio (solid line) is also starting to bounce. Chart 5 shows the Financials SPDR approaching a monthly high on rising volume. Its relative strength ratio is starting to rise as well. The biggest daily gain was seen in homebuilders. Chart 6 shows the S&P Homebuilder SPDR jumping more than 10% on very heavy volume. The XHB is nearing a test of its 50-day average. Financials and homebuilders were helped by today's announcement of a government plan to limit subprime mortgage defaults. Since those two groups were the biggest weights on the market, today's gains gave the market a nice lift. The same is true of small caps. [If you haven't already done so, please read today's earlier messsage showing how the Market Summary page showed upside leadership in small caps, financials, and energy stocks at midday. Energy stocks rose 2.7% with oil service stocks gaining 3.9%]. The next fundamental hurdle the market needs to survive is tomorrow morning's employment report which could have some bearing on what the Fed does next Tuesday. If the market can hold today's gains through Friday's close (or build on them), the technical picture will look a lot better through yearend.

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