DOWN MARKET DURING FIRST WEEK OF JANUARY IS AN EARLY WARNING -- WALGREEN AND GENERAL MILLS LEAD CONSUMER STAPLES HIGHER -- WHY THE BEST BUY MAY BE CASH

CONSUMER STAPLES ARE TOP SECTOR FOR THE WEEK ... While all of the other market sectors lost ground this week, consumer staples suffered the least damage and even eked out a minor gain. It was also Friday's biggest gainer in the face of another losing day. That makes sense considering that this is a defensive group that does better when the rest of the market weakens. This isn't something new. I've written several pieces over the last month showing money starting to flow into this 2004 laggard. I also interpreted that as a sign that the market was starting to turn more defensive at year's end. Notice the sudden jump in the relative strength line for the Consumer Staples Select Sector SPDR (XLP) during the last week. That's where money usually goes when the market starts to look toppy. I also wrote recently that, in a normal sector rotation, consumer staples usually take over leadership after energy has peaked. After peaking in October, the energy sector has been one of the new year's weakest sectors.

Chart 1

Chart 2

ROTATION FROM ENERGY TO STAPLES... Chart 2 shows the Energy Select Sector SPDR (XLE) peaking in late November. Notice that the late November peak in its relative strength line (see down arrow) coincided with a flattening out in the consumer staples RS line (first up arrow in Chart 1). That tells me that some of the money coming out of energy found its way into the staples. Chart 3 plots a ratio of the Consumer Staple ETF (EXP) divided by the Energy ETF (XLE). Throughout 2004, the ratio favored energy over staples. Starting in late November, however, the pendulum swung away from energy toward staples. The XLP/XLE ratio has broken out to the highest level since mid September. Right now, staples are a better bet than energy. In fact, consumer staples may be the best bet in the market right now. Several individual staple stocks had a strong week in the teeth of a down market.

Chart 3

WALGREEN EXPLODES... Earlier in the week I showed Walgreen hitting a 52-week high on rising volume. That's only part of the story. Its weekly bars in Chart 4 show the staple sector leader achieving multi-year highs on extremely heavy volume. That's a bullish combination. Its weekly relative strength line, which bottomed last spring, is also breaking out to the upside. But there's more. The monthly bars in Chart 5 show WAG having broken through its early 2002 peak at 40. That puts it on track to reach its late 2000 peak just above 45.

Chart 4

Chart 5

ALBERTO CULVER, P&G, AND AVON ADVANCE... The next three charts show snapshots of three other consumer staple stocks that had good weeks. Alberto Culver surged to a six-month high on rising volume. Its relative strength line also turned up (Chart 6). Procter & Gamble ended the week on a strong note and bounced impressively off its moving average lines. Its relative strength line also appears to be bottoming. Avon Products had been a group laggard -- until Friday. The stock broke through its 50-day average on rising volume. It needs to do a lot more to turn its trend higher, but it attracted good buying at week's end. Its relative strength line closed over its moving average line for the first time in two months.

Chart 6

Chart 7

Chart 8

GENERAL MILLS NEAR RECORD HIGH ... Back on December 28, I listed General Mills as one of the more promising stocks in the consumer staples group. The stock had an outstanding week. Its daily chart shows GIS having broken through its spring high at 49 on rising volume. Its relative strength line, which had been dropping all last year, has exploded upward. But there's more. Chart 10 is an updated version of the monthly chart I showed on December 28 with the same two converging trendlines. I described those lines as a bullish "triangle", and wrote that the bullish pattern raised "the likelihood that the stock's late 2001 peak near 51 will be tested and eventually broken". GIS closed just shy of a new record high.

Chart 9

Chart 10

S&P GIVES FIRST WEEK WARNING... The S&P 500 ended the week with a loss of nearly 30 points (-2.4%). According to the historical record since 1950, a down close during the first week of January by the S&P 500 has resulted in a down year 45% of the time. A loss for the entire month of January raises the percentages for a down year to 58%. [For a more in-depth explanation of the reliability of the January signals and other seasonal and yearly tendencies, please see the message I wrote earlier today (January 07, 2005). The good news is the the S&P 500 SPDRs (SPY) are still trading over their 50-day moving average. The bad news is that the Nasdaq market and the Russell 2000 Small Cap Index closed beneath that support line. Those were the two groups that led the market higher during the second half of 2004. They're now leading it lower. Also of concern is the volume pattern during the week. The biggest (red) volume bars took place during the four days while prices were falling. The smallest (green) volume bar took place on Thursday when the market managed a modest bounce. That means there's a lot more downside volume than upside volume. And that's not a good sign for the market. Daily indicators like the MACD lines have turned negative. [The weekly and monthly lines are still positive, but weakening]. If the S&P cracks its 50-day line, the next support shelf sits at 117 (see green arrow). The most significant support level on the chart is the early October peak near 114 (see green circle). Any close beneath that level would, in my opinion, significantly weaken the long-term picture.

Chart 11

A BUY SIGNAL IN CASH?... I suggested during the week that it isn't too soon to start shifting some money into cash equivalents like a money market fund to take advantage of rising short-term rates. [The piece I wrote earlier today also explains why January is the best time of the year to take some profits out of the market]. I also suggested shifting some funds into the consumer staples and/or healthcare sectors which are more defensive in nature (and which were the week's two top performers). You can do that with an Exchange Traded Fund like the one shown in Chart 1. Or, if you prefer individual stocks, take a look of some of the staple leaders shown above. Chart 12 is another version of a chart I showed on Wednesday. It's a point & figure chart that shows a new uptrend having started for the first time since 2000 (five years ago). If this were a chart of a stock, we'd rate it a buy. It's actually a chart of the 3-Month T-Bill Yield. That means that the return (or yield) on "cash" (in a T-bill or money market fund) is in a new uptrend. That's what I meant earlier in the week when I said that "cash" was in a new bull market. It isn't trash anymore. In fact, the return on cash is one of the few things going up at this point.

Chart 12