SECTOR RANKINGS SHOW BULLISH CONFIDENCE -- TOP 2010 PERFORMERS ARE FINANCIALS, DISCRETIONARY, SMALL CAPS, TRANSPORTS, AND THE NASDAQ -- DEFENSIVE GROUPS LAG BEHIND -- MARKET BREADTH REMAINS POSITIVE AS NYSE ADVANCE-DECLINE HITS RECORD HIGH

GROUP LEADERSHIP SHOWS CONFIDENCE... The fact that major market indexes are hitting new recovery highs is a vote of confidence for the market and the economy. That's because the stock market is a leading indicator of the economy. What's also impressive is where market leadership is coming from. Historically, certain market groups act as leading indicators for the rest of the market. In other words, they lead it higher during a bull market and are often the first to peak at a top. So far we're seeing more of the former and no evidence of the latter. To illustrate what I mean, Chart 1 shows five market groups, or indexes, that are rising faster than the S&P 500 (which is plotted as the flat zero line). The top five performers (in order of their 2010 relative strength) are financials, consumer discretionary stocks, small caps, transports, and the technology-dominated Nasdaq. Virtually every one of those groups turned down before the rest of the market during the second half of 2007. Right now, all five are still leading it higher. That's a positive sign.

Chart 1

Chart 2

MARKET LAGGARDS ... By contrast, certain defensive market groups become market leaders during a period of stock weakness, and are laggards during a bull run. Chart 2 shows the three weakest market sectors in the first four months of 2010. All three are plotted "relative" to the S&P 500 which is the flat black line. The three weakest groups are utilities, healthcare, and consumer staples. [Utilities are the only sector actually in the red for 2010]. The fact that those three defensive groups are underperforming the rest of the market also shows market confidence.

INDUSTRY GROUP LEADERS ... We see the same optimism when we look for market leadership among industry groups. Chart 3 shows that three of the top industries during 2010 to be retailers, homebuilders, and the Internet. [Banks, biotechs, and REITs are not shown although they're also 2010 leaders]. Semiconductors were relative underachievers until this month. In fact, they jumped into first place among industry groups over the last week. The fact that those groups are acting as market leaders is another positive sign for the market.

Chart 3

NYSE ADVANCE-DECLINE STILL CLIMING ... On Tuesday March 9, I wrote a bullish piece showing upside breakouts in many of the same groups shown here today: small caps, the Nasdaq, homebuilders, the Internet, consumer discretionary stocks, retailers, REITS, and transports. I also wrote that a new recovery high by the NYSE Advance-Decline line increased the odds for continuation of the bull market. That's because the NYAD (which measures the difference between advancing and declining stocks) usually peaks "before" the major market indexes. So far, there's no sign of the NYAD peaking. In fact, Chart 4 shows the line hitting a new record high. That doesn't tell us how long the bull run will last or how high it will go. It just tells us that there's no sign of it ending.

Chart 4

CHEVRON BREAKS OUT... I expressed the view yesterday that stocks tied to commodity prices should start playing catchup to the rest of the market. I showed the Energy SPDR testing its 2010 high and suggested that an upside breakout in that sector could be imminent. Those odds are increased by the ability of the largest stock in the XLE already achieving a bullish breakout. The daily bars in Chart 5 show Chevron climbing above its January high near 80. Its relative strength ratio (solid line) has started climbing for the first time this year. The weekly bars in Chart 6 show the big oil stock also breaking through a "neckline" drawn along its late 2008/early 2010 peaks. That puts the stock at the highest level since mid-2008 and adds to the chart's bullish look. The relative strength ratio (solid line) in Chart 6 shows that Chevron has been a market laggard over the last year. That also makes it a pretty good value at current levels, especially if energy prices continue to climb as I expect they will.

Chart 5

Chart 6