ENERGY SECTOR JUMPS -- RETAILERS ARE DISCOUNTED -- RISING OIL HURTS AIRLINES

ENERGY ETF BREAKS OUT... After lagging behind the rest of the market for the past year, the energy sector finally got energized today. In a generally listless trading day, the Energy Select Sector SPDR jumped over 2% and was by far the day's standout performer. Chart 1 shows the XLE breaking through the highs of October and November to achieve a bullish breakout. The rising relative strength line along the bottom also appears to be turning up. Today's catalysts were the OPEC decision to leave their output unchanged and a burst of frigid weather in the northeast. Although crude and heating oil gained ground, natural gas was the real story of the day. Natural gas futures prices surged more than 9% to reach the highest level in six months. Natural gas stocks have been the strongest part of the energy patch as shown in Chart 2.

Chart 1

Chart 2

OIL LEADERS... A number of energy stocks hit 52-week highs today including Apache, Conoco Phillips, Occidental Petroleum, Sunoco, and Unocal. Chart 3 shows UCL breaking through chart resistance formed over the past year. The weekly bars in Charts 4 and 5 show Anadarko and EOG Resources sporting promising chart patterns. Anadarko needs to clear 50 to complete a major bottom. EOG is close to multi-year high.

Chart 3

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RETAILERS FALL... Heavy selling of retail stocks made the Consumer Discretionary Select SPDR the day's biggest loser. The daily chart shows the group selling off today. The falling relative strength line along the bottom also suggests that money is starting to rotate of this former leading group. The weekly bars in Chart 6 may explain why. The XLY has reached a formidable resistance barrier along the highs formed during 2002. What better time to take some profits. Judging from today's high-volume stock drops, that's what a lot of investors are doing.

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RETAIL LOSERS... The next three charts show three of the day's biggest retail losers. All fell on very heavy volume. Famiily Dollar Stores shattered its 200-day average; Dollar General may not be far behind. Best Buy broke its 50-day average. Other big retail losers were Circuit City and Dillards. For money managers, rotation is the name of the game. When a leading group starts to look tired, they rotate money into a lagging group that's just starting to turn up. My guess is that a lot of the money coming out of retailers is moving into energy.

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OIL JUMP HURTS AIRLINES... Airline stocks are especially sensitive to the direction of oil. With today's upside fireworks in energy prices and stocks, it wasn't a surprise to see airlines turn in one of the day's worst performances. The XAL Index is trading well beneath its 50-day average -- just as the OSX Index is climbing above its 50-day line. What's good news for one sector (energy) is often bad news for another (airlines).

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