RETAILERS AND SMALL CAPS PULL MARKET LOWER -- DOW BACKS OFF FROM 11K -- OIL STOCKS WEAKEN -- GOLD NEARS $500
HEAVY RETAIL SELLING... With the holiday shopping season upon us, all eyes are focused on retailers. For today at least, investors weren't impressed with what they've seen so far. As a result, the Retail Holders were one of the day's biggest losers. To make matters worse, they sold off on the heaviest trading in nearly two weeks. No serious chart damage has been done to their overall chart pattern. However the retailers have been one of the market leaders over the last two months. The RTH/SPX ratio line has been slipping a bit which is causing short-term profit-taking in both. Oil stocks are also taking a heavy hit today owing to sharply lower oil prices.
Chart 1
ENERGY SPDR FAILS TEST OF RESISTANCE ... Last week I showed the Energy Sector SPDR (XLE) testing its early November peak just above 51 after having cleared its 50-day average. After backing off from 51, the XLE is trading back under its 50-day line today. Volume is also picking up. That's mainly because warmer weather in the northeast has pushed crude prices down 2.9%, heating oil down 3% and natural gas down 6%. The Oil Service Holders (OIH) are trading back below their late September peak. That threatens to nullify last week's breakout into new high ground.
Chart 2
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SMALL CAPS BACK OFF FROM OLD HIGH ... Small caps have lagged behind large caps during the fourth quarter rally. And they're being sold today harder than the large caps. Part of the reason may be due to the fact that the S&P 600 Small Caps Index (Chart 4) and the Russell 2000 Small Cap Index (Chart 5) are up against resistance at their August highs. The fact that the small caps have been lagging behind may also explain why market breadth figures haven't been that impressive during the current rally. There are more small stocks than larger ones. Today's small cap selling is also causing nervous profit-taking among large caps. Another reason is due to the fact that the Dow Industrials are up against their 2005 high.
Chart 4
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DOW BACKS OFF FROM 11,000... The Dow is the last of the major indexes to attempt a breakout into new high ground. Chart 6 shows the Dow testing its March high at 10984. The fact that the Dow is somewhat over-extended is probably causing some short-term selling. If a pullback does occur, the August/September highs along 10,700 should provide a cushion under the Dow.
Chart 6
DOLLAR PULLS BACK AS GOLD NEARS $500 ... A continuing dip in U.S. interest rates is causing the dollar to weaken today below major chart resistance along 92.00. At the same time, gold is drawing very close to the $500 level which could act as a temporary resistance barrier. While the XAU Index has scored a major bullish breakout (Chart 7), the AMEX Gold Bugs Index (HUI) is still trying. The reason for the lagging performance in the HUI is that it includes gold stocks that hedge their gold production. They usually don't do as well as "unhedged" gold stocks that comprise the XAU. I'm reluctant to recommend profit-taking in gold or gold stocks because of my long-term bullish view. But I wouldn't fault anyone for selling a small portion of their position as gold nears $500 while holding onto their larger core position. Or, as an alternative, tightening protective stops under a portion of their long position.
Chart 7
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