BOND YIELDS FALL ON LOW INFLATION NUMBER WHICH HELPS FINANCIALS -- BEST BUY AND BED BATH AND BEYOND LEAD CONSUMER DISCRETIONARY GROUP -- HOME DEPOT ACHIEVES ANOTHER BREAKOUT -- USING DIFFERENT TIME DIMENSIONS

CONSUMER DISCRETIONARY ETF HITS THREE-MONTH HIGH ... On a day when the market experienced minor gains, one of the standout groups was consumer discretionary stocks. Chart 1 shows the AMEX Consumer Discretionary Select SPDR hitting a new three-month high today on big volume. Its relative strength ratio line has been rising since mid-August which shows new money flowing into this sector. One of the driving factors in this group may be the continuing drop in long-term interest rates which is good for consumer spending. One way to take advantage of that trend is to buy the Exchange Traded Fund. Another way is to look at some of the leading stocks in the fund.

Chart 1


BEST BUY SURGES ON VOLUME... The best performing stock in the group over the last week has been Best Buy. The daily chart shows the stock surging on rising volume and breaking through its 200-day average. Its relative strength ratio line is rising sharply as well. Although it looks over-extended on a short-term basis, its longer term prospects look promising. The weekly bars in Chart 2 show the stock having broken a major down trendline starting from last November. The weekly volume bars show heavy upside trading over the last three weeks. And, the weekly MACD lines have turned bullish for the first time this year.

Chart 2

Chart 3


BED BATH & BEYOND EXCEEDS 200-DAY AVERAGE... Here's another potential leader in the consumer discretionary group. BBBY started to show new relative strength toward the end of August. Its relative strength ratio line is now climbing which means the stock is outperforming. Even better is the ability of the stock to close over its 200-day moving average for the first time since April. That's a good combination. The only negative is the relatively light trading volume. The weekly bars also paint a picture of an emerging longer-term uptrend. The last weekly bar has broken the 2004 down trendline; the weekly MACD lines have turned positive; and the BBBY/S&P 500 ratio line has turned up. BBBY qualifies as a buying candidate in a group that's starting to attract new money.

Chart 4

Chart 5


HOME DEPOT SHOWS NEED FOR PERSPECTIVE ... On September 2, I wrote a bullish piece on Home Depot which is the biggest stock in the consumer discretionary ETF. At the time, the stock had just broken through its summer high and was moving up to test the top of yearlong trading range at 38. That important chart barrier has now been broken. The point of the next three charts is to update that earlier analysis, but also to show why it's important to blend different time dimensions to keep short-term trends in proper perspective. The daily chart by itself shows a stock rising on good volume but looking somewhat over-extended. That might scare away potential buyers if that was all we looked at. But it isn't. The weekly bars in Chart 7 show the consumer leader having just broken through major resistance at 38. That bullish breakout diminishes the importance of the short-term overbought condition, and suggests that chart support should now reside at the breakout point at 38. Why, however, would anyone want to buy a stock trading at a new 52-week high? Isn't that too expensive? Not if you look at the monthly bars in Chart 8. That chart shows the stock peaking at 70 at the start of 2000 and bottoming at 20 near the start of 2003. The stock is just now breaking out of a trading range after breaking its major bear trendline earlier this year. When the rest of the market sold off, HD traded sideways. That's the kind of stock that takes off when the market rallies. The horizontal Fibonnaci retracement lines also put the current rally into perspective. The stock is approaching the 38% retracment level at 40 which is a minimum expectation. A 50% retracemet of the previous bear trend takes the stock to 45. A 62% retracment, which appears more likely, doesn't occur until the low 50s. That coincides with major chart resistance along the 2001-2002 peaks. The moral of the story is what may look expensive on a daily chart may look cheap on a monthly chart. That's why it's important to look at all three.

Chart 6

Chart 7

Chart 8


LOW INFLATION REPORT PUSHES BOND YIELDS LOWER... The August CPI report came in at a +.01% which was lower than expected. That had a bullish impact on the 10-year Treasury note which rose 24/32. The yield, which moves in the opposite direction, fell to the lowest level since the spring. Groups that benefit the most from falling rates (besides consumer discetionary stocks) are financials, utilities, and REITs which are all plotted below the yield chart. You can see that all three rate-sensitive groups have been outperforming the market since May when bond yields peaked (see green arrows). That was the case again today. Of the three sector charts, the one I believe looks most attractive is the Financials Select Sector SPDR shown in Chart 10. That's because it's the closest to its recent breakout point at the June high. And, the XLF is consolidating in a "pennant" formation just above the breakout point. That's a bullish combination.

Chart 9

Chart 10

Chart 11

Chart 12


MARKET HAS SMALL BOUNCE, BUT NOTHING HAS CHANGED ... The market achieved a modest low-volume bounce today which doesn't change the short or long-term chart picture. The Dow is still trading under its 200-day line, while the Nasdaq 100 continues to stall beneath that resistance line. Although the outlook for the balance of the year is more bullish, the short-term trend has stalled due to a short-term overbought condition. In my opinion, the best way to play things is to concentrate on groups showing the best relative strength. That includes some that I've written about this week like biotechs, consumer discretionary stocks, Internet stocks, and financials. If you haven't already done so, please read this afternoon's article on the biotech group and how I go about analyzing sector trends. The principles discussed in that piece should shed some light on the sector rotation process and how to capitalize on it. Fortunately, charting works especially well for that purpose.

Chart 13

Chart 14

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