RETAILERS MARK DOWN OVERBOUGHT MARKET

RETAILERS FALL ON VOLUME... Today's weak performance by retailers is causing some nervous selling in an overbought market. Disappointing July retail sales have made the group one of the day's weakest performers. Some of today's selling may also be the result of some chart selling based on poor technical action. The daily price bars in Chart 1 show the Retail Holders (RTH) gapping down today. What's more troubling is the big jump in trading volume over the last two days as the group has weakened. That suggests there's more selling to come. The daily MACD lines have also turned negative. And the RTH/SPX ratio (under the price chart) is breaking a three-month up trendline. That may explain why the retail selling is having such a negative impact on the rest of the market today. Retailers are a key group because they reflect consumer spending. And they've been market leaders since the last rally began in the spring. Any loss of retail leadership removes some market confidence.

Chart 1

Chart 2

RETAIL RELATIVE STRENGTH IS TOPPING ... Chart 2 provides a more detailed look at the Retail Holders/S&P 500 ratio. It shows that the ratio is backing off from chart resistance formed last November (see circles). The ratio has also fallen below the 20-day moving average (blue line) for the first since early May when the market rally began. It's usually not a good sign for the market when a key leader like retailers runs into resistance and starts to weaken. That also comes at a time when the S&P 500 is starting to look somewhat over-extended itself. The fact that we're now in the month of August, which is traditionally a weaker month than July, may also be causing some nervous seasonal profit-taking. Crude oil prices testing their all-time high near $62 aren't helping either. MORE LATER.