MARKET UPTREND STILL INTACT -- NASDAQ IS CLOSEST TO ITS 200-DAY AVERAGE -- HOUSING STOCKS ARE LEADING THE WAY HIGHER -- REFLATION TRADE FAVORS COMMODITY ASSETS -- SOME BOND PRICES ARE RISING

NASDAQ NEARS 200-DAY LINE ... The market bounce that started on March 9 remains intact. As has been the case all year, the technology-dominated Nasdaq market is leading the market higher. Chart 1 shows the Nasdaq Composite Index having cleared its January high and nearing a test of its 200-day moving average. Upside leadership by technology is usually a good sign for the rest of the market. So is small cap leadership. Small caps also show relative strength at market bottoms. Chart 2 shows the Russell 2000 Small Cap Index having cleared resistance at its early February peak. Its relative strength line bottomed in March. The S&P 500 Large Cap Index (Chart 3) is still testing resistance in the 875-877 region. I think the odds are pretty good for it to exceed that chart barrier and move closer to its January high. As I've written recently, I believe that the market is in the process of forming a major bottom. I suspect that the current rally could continue for a couple more weeks (into May) before running into some profit-taking. A pullback from there could be part of a "head and shoulders" bottom that I wrote about last week. Since the Nasdaq will probably be the first major index to reach its 200-day line, that may help determine if the current rally has much further to run or is nearing completion.

Chart 1

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HOUSING STOCKS LEAD THE WAY ... Housing stocks led on the way down and may now be leading on the way up. In case you haven't noticed, homebuilding stocks were the strongest industry group over the last week and the last month (REITS were strong as well). That's a very encouringing sign for the economy and the stock market (not to mention homebuilding stocks). Their chart pattern is encouraging as well. Chart 4 shows S&P Homebuilding SPDR (XHB) challenging its high of last December and its 200-day moving average. The large green volume bars reflect heavy buying over the last month. The XHB/S&P 500 relative strength ratio (bottom of chart) has risen to the highest level in six months. Since the performance of housing stocks are a leading indicator of the housing industry, I take the recent signs of strength in homebuilders as a positive sign that that things are starting to get better.

Chart 4

OTHER MARKET LEADERS ... Also encouraging is where other market leadership is coming from. Chart 5, for example, shows the Consumer Discretionary SPDR (XLY) testing its January high and 200-day line. [The XLY includes retailers and homebuilders]. The economically-sensitive Materials Sector SPDR (XLB) has just cleared its December high (Chart 6). This week's material leaders were chemicals and papers. Buying of material stocks shows more optimism on the economy and the prospects for higher commodity prices. Although the energy sector has been a market laggard, oil service stocks are doing quite well. Chart 7 shows Oil Service Holders trading at a six-month highs. Arthur Hill wrote this week about how commodity prices (including gold) were starting to benefit from a falling dollar. Part of the optimism on commodity assets is based on the view that heavy government spending will produce higher inflation in the years ahead. The "reflation" trade includes such things as commodities, the Australian Dollar (Chart 8), and emerging markets like Brazil (Chart 9) and China (Chart 10). China iShares are the first ones to clear their 200-day average.

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SOME BOND PRICES ARE RISING ... A lot of attention is being paid to falling Treasury bond prices. Chart 12, for example, shows the 7-10 Year Treasury Bond ETF (price bars) falling near yearly lows and the 10-Year Treasury Note Yield (green line) rising to 3% (Bond prices and yields trend in opposite directions). Expectations for heavy government borrowing (and more optimism on the economy) are causing some investors to abandon Treasury bonds. Some of that money may be moving into stocks. Some of it, however, is moving into other fixed income categories that are rising in price. Chart 12 shows the investment grade corporate bond ETF (LQD) rising in price as investors become more confident about corporate profits. Investors who are sniffing some inflation in the future are buying Treasury Inflation Protected Securities (TIPS). Chart 13 shows the TIP iShares also rising in price. High-yield corporates and municipal bond prices are also rising. There's no need to abandon the fixed-income sector just because Treasury bonds are losing value.

Chart 11

Chart 12

Chart 13