The advance by major market averages over the past few days is significant because it is broad based. The Nasdaq, Dow Jones Industrials and S&P 500 Index all climbed back to prior recent high levels. So far this year the equity markets have generally been split on ralllies–the blue chips would make new highs while the Nasdaq lagged.

The chart below illustrates the current situation. The red line is the Nasdaq, the green is the Dow, and the yellow is the S&P 500. Notice that on the latest move, the three indices have been in lock step (of course that ended today with the Nasdaq losing ground while the other two went up). The Nasdaq surged past its prior hight set early in April. The Dow and the S&P 500 equalled or surpassed multi-year highs reach in March. So far the Nasdaq is up 7.5% for the year, the Dow is up 5.2% and the S&P 500 is up 4.9%. But the gains have come via a very bumpy ride. This recent rally was triggered by quarterly earnings reports. Whether or not it continues and its amplitude are dependent on those reports continuing to provide positive surprises.

Meanwhile, we continue to see rotation among industry sectors. Energy and gold are still the strongest sectors, as explained last week. But Some of the best sectors a month ago are now at the bottom of the ranking. For example, telecommunications funds have been strong most of 2006, but they dropped dramatically over the past month. Merrill Lynch Telecom HOLDRS (TTH) is down about 3% and other telecom funds are showing similar declines. Another sector starting to struggle is real estate. After being a leading fund for much of 2006, iShares Cohen & Steers Realty Major Index Fund (ICF) has fallen more than 5% since mid-March.

The overall, worst-performing sector for 2006 to date is probably utilities. Most utility funds are slightly below break even for the year. For example, iShares Dow Jones U.S. Utilities Index Fund (IDU) is down 0.24% in 2006.

International funds generally continue to outperform the U.S. market–particularly the Asian or Pacific Rim funds. For example, iShares FTSE/xinhua China25 Index Fund (FXI) is up more than 12% over the past month. Others performing well over that period include iShares MSCI - Australia Index Fund (EWA), +10.33%; iShares MSCI - South Korea Index Fund (EWY), +9.78%; Nasdaq BLDRS Asia 50 ADR Index Fund (ADRA), +9.43%; iShares MSCI - - Pacific (ex-Japan) Index Fund (EPP), +8.9%; iShares MSCI - Taiwan Index Fund (EWT), +8.8%; and several others up more than 5% over the past month.

The best performing U.S. index continues to be the Russell 2000. This index is comprised of small cap stocks and over th past six months it has returned 22%, compared to 13% for the Nasdaq. Among ETFs, iShares Russell 2000 Growth Index Fund (IWO) is leading the way with a gain of 5.14% over the past month.

Over the next month, quarterly earnings reports are probably the key to U.S. market performance. As long as corporations continue to do well we will probably see a continuation of the shaky advance that is currently moving stocks higher. In fact, a good earings season might even help smooth out some of the bumps that have kept investors from feeling comfortable.

Have a great weekend.