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Stock Market Rallies, Software Leads But Will These Blue Chips Re-Energize The Dow?

The Dow Jones industrial average stood head and shoulders above other key indexes at midday on Thursday, even after a mild pullback in early-afternoon trade.

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At 1:15 p.m. ET, the Dow gained 0.7% after rising more than 1% thanks to early two-point gains from at least 10 of the Dow's 30 components, including Home Depot (HD), Caterpillar (CAT), UnitedHealth Group (UNH) and McDonald's (MCD).

Home Depot and McDonald's are in base-building phase, and a well-built base could give investors a chance to buy at a key moment of market strength.

Low weekly jobless claims helped sustain confidence in the U.S. economy, and comments by White House economic advisor Peter Navarro, broadcast on CNBC, apparently helped relieve anxiety over the potential for a major trade war.

Bullishness among market pundits polled each week by Investors Intelligence, meanwhile, jumped this week to 54.9%, but optimism is not excessive. In mid-January, ahead of the early-February market sell-off, the bulls ratio reached as high as 66.7%.

The Nasdaq composite erased an early-morning loss of 0.3% to turn more than 0.2% higher before slumping to the breakeven point. Overall, the intraday swing is light, though. The S&P 500 edged up less than 0.1%. Discount and variety retail, hospital, mining equipment, ethical drug and truck transport firms paced the upside. Volume is running slightly lower vs. the same time Wednesday on both main exchanges.

The Dow transports is now up just 0.4% after being up as much as 0.7%.

Despite the indexes' gains, breadth was slightly dour. Falling stocks beat gainers by more than 3-2 ratio on the NYSE and by fewer than 200 issues on the Nasdaq.

Home Depot is trying to bottom out after falling more than 15% below a 207.60 all-time high. The do-it-yourself and do-it-for-me home improvement products chain had rallied 28% following a September breakout from a solid flat base with a 160.96 buy point.

Home Depot sports a decent 87 Composite Rating from IBD Stock Checkup, boosted by a strong 92 EPS Rating on a scale of 1 to 99.

McDonald's, which has dropped 18% from its all-time peak of 178.70, rallied nearly 2% and is trying to regain its critical 200-day moving average. The fast-food chain's 50-day line has been sloping lower for more than five weeks, a negative sign.

When high-quality stocks rally 20% to 25% from a proper buy point, it's an excellent idea in terms of portfolio management rules to take at least partial profits. IBD research has found that many leading stocks will top out and begin a serious correction after rising 20% to 40% past a breakout point.

Software remains an important growth theme in the stock market today. While Palo Alto Networks (PANW), a big stock market winner in 2015-16 and former Leaderboard stock, has shown renewed strength, its group peer VeriSign (VRSN) is also acting well.

The former is aiming for a 14th gain in 15 sessions; at 189.30, the large-cap network security leader has risen nearly 21% from a base breakout at 156.95. The latter rose nearly 2% to 125.35 in volume running double its usual levels and has climbed nearly 6% past a 118.38 entry in an 11-week flat base.

Four highly dynamic and fast-growing companies in the business software space maintain a position currently within Leaderboard.

The Dow transports rallied 0.3% as Covenant Transport (CVTI) launched a breakout, gapping up at the open and rising nearly 18% to 32 in huge turnover. That move catapulted the trucking services firm past a 30.71 proper buy point in a five-month base.

The 5% buy zone extends up to 32.24. Buying more than 5% past a proper buy point can hand a new investor the added risk of being shuffled out of the stock with a fast loss of 7%-8% during a normal pullback to or even slightly below the breakout price.

The golden rule of investing is to cut losses short, even if a stock has a history of outperforming. You don't want to get caught with a stock that has finally topped after a huge price run.

IBD's research on big stock market winners over the past century has found that when a true market leader breaks out, it rarely falls 7% to 8% below the correct buy point. But after a 10% or 15% move up or more, it's not uncommon for the stock to dip back and test holders' resolve. So if an investor

The base built by Chattanooga, Tenn.-based Covenant doesn't have the look of a well-formed cup-with-handle or a double-bottom, but the months long base was built on top of an even longer, deeper consolidation. The chart has elements of base on base patterns, which can be very bullish.

The company has notched earnings gains of 56% and 52% vs. year-ago levels in the past two quarters as revenue rose 9% and 6%. The top-line growth is an improvement from declines and much smaller increases in the prior six quarters.

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