MARKET RALLIES ON CONTINUING DROP IN OIL PRICES AND BIG JUMP IN RETAIL SPENDING -- HOME DEPOT LEADS RETAIL GROUP HIGHER

JANUARY RETAIL SPENDING JUMPS 2.3% ... The market is being helped by at least two factors today. One is the continuing drop in crude oil prices to the lowest level in 2006. While energy stocks are the day's weakest group, retailers are one of the day's strongest. Retailers are benefiting from two factors. One is the continuing drop in energy prices. The other is the 2.3% jump in January retail spending, which was the largest gain since May 2004. The daily bars in Chart 1 show the positive chart action. The Retail Holders (RTH) have climbed back over their 200-day average and are trading back over their 50-day line by the widest margin since last December. The relative strength ratio beneath the price chart shows that retailers have been weak performers since mid-November. After stabilizing for more than a month, the retail RS line is starting to rise. The combination of falling energy prices, and rising retail stocks, is giving the market a nice boost today.

Chart 1

HOME DEPOT BOUNCES OFF TRENDLINE SUPPORT... Home Depot is gaining near 3% today and is one of the biggest reasons for the day's gain in the RTH. That's because HD is the biggest stock holding in the retail ETF with a weight of 40%. Chart 2 shows that the rally in HD is coming at an opportune time. That's because the stock is bouncing off a support line that started in May of 2004. Its relative strength ratio shows that the stock has been an underachiever over the last year. Notice, however, that the RS line is now in a support level itself (blue horizontal line) that's prompted the two previous upturns (blue arrows).

Chart 2

INVERSE LINK BETWEEN OIL AND RETAILERS ... It's no secret that retailers are one of the most sensitive groups to the trend of energy prices. And it's no accident that the current upturn in retailers is occurring at the same time that energy shares are falling. To show their inverse link, Chart 3 plots two ratios. The green ratio is Retail Holders (RTH) divided by the S&P 500. The black ratio is the Energy SPDR (XLE) divided by the S&P. The chart shows a strong tendency for the two ratios to trend in opposite directions. I wrote recently that the drop in energy shares would help the market to the extent that some other groups that benefit from falling energy prices start to show signs of new leadership. Retailers are at least making a bid for that role.

Chart 3