Trading Places with Tom Bowley

U.S. Stocks Just Received Yet Another Bullish Signal

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I love to see a leading industry group go through a lengthy consolidation period on both an absolute and relative basis....and then break out. There haven't been too many groups that have consistently performed better than software ($DJUSSW) over the past several years. Here's a long-term weekly chart on the group:

Software stocks have been consistent leaders throughout this bull market and they're beginning to show absolute and relative strength again. They didn't break above their highest daily of close of 4446.11 on September 2nd, but they did break out of a bullish symmetrical triangle continuation pattern:

Then there's the RRG where we can see what software is doing relative to the S&P 500. First, the daily RRG, then the weekly RRG:

Daily RRG:

It's quite normal for ANY group to be on the left side of a daily RRG chart (weak relative strength), while it is consolidating. But you can see that we're now seeing the most recent strength lead the DJUSSW in northeast fashion (bullish) toward the leading quadrant. That's definite improvement.

Weekly RRG:

At first glance, I'd be concerned about software turning back towards the lagging quadrant on a weekly basis. But let's remember a couple things. First, that 100 RS line is where leading groups, that have been consolidating, begin to lead again. Second, we just saw a triangle breakout two days ago, certainly not enough time to impact a weekly RRG chart. Absolute breakouts will impact short-term charts a whole lot more than long-term charts.

One last thing. Since the bear market ended in 2009, we've come a long, long way in U.S. equities and software has been a huge part of it. But over the past decade, the month of December hasn't exactly been kind to the group. Check out the decade-long seasonal trend:

December has been the group's 2nd weakest month, trailing only September. But January has been the group's 2nd best month, trailing only April. So I will draw the following conclusion from the above. After a well-deserved rest and hiatus, welcome back software! It appears that we're setting up to see leadership from this key group as we move towards a brand new year. Over the past 10 years, January has been much kinder to software and, based on all the evidence above, it looks like we're setting up for a new years party in this industry.

Tomorrow marks our 2nd annual MarketVision event. David Keller, Chief Market Strategist, StockCharts.com and Grayson Roze, Vice President of Operations, StockCharts.com will join me in presenting our 2021 market outlook, both for our companies and for the stock market. If you're interested in joining us, CLICK HERE for more information!

Happy trading!

Tom


Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
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