FALLING ENERGY PRICES BOOST RETAILERS WHICH SHOW NEW LEADERSHIP -- FALLING BOND YIELDS BOOST OVERSOLD HOMEBUILDERS -- DOW HITS NEW FOUR-MONTH HIGH

FALLING OIL BOOSTS RETAILERS ... Over the last year, one of the market sectors most hurt by rising energy prices has been retailers. With oil prices falling to a five-month low, however, retailers have become one of the market's strongest groups. To show how closely the two markets are tied, Chart 1 overlays the price of crude oil (black line) over daily bars of the Retail Holders (RTH) since the start of the year. Notice that the upturn in crude in early April (first black arrow) coincided with a downturn in the RTH (red circle). The oil peak in early July (second black arrow) coincided with a retail bottom (green circle). The daily bars show the RTH surging to the highest level in four months in today's trading. The RTH/S&P 500 relative strength ratio (below chart) is also rising strongly for the first time this year.

Chart 1

RETAIL HOLDERS ARE BACK IN FAVOR... It's no secret that retail stocks have been underachievers all year. [They've been underachievers for as long as oil prices have been rising]. The weekly bars in Chart 2 show the Retail Holders in a sideways trading range lasting a little over a year. After bouncing off the lows of last autumn in early July, the RTH is close to challenging its early 2006 peak near 98. A decisive close over that chart barrier would be a bullish sign for the retail group. A positive message is also being given by the RTH/SPX relative strength line below Chart 2. The RS line had been dropping since the middle of last year as retail stocks lagged behind the rest of the market. To the bottom right, however, the relative strength ratio is breaking that yearlong down trendline (green circle). That's the first sign of market leadership by the retail group in several years. Two of the largest stocks in the RTH -- Home Depot and Wal Mart -- are rallying.

Chart 2

WAL MART NEARS TEST OF 50... We can't examine the direction of the retail sector without consulting a chart of Wal Mart. That's because it's the most heavily-weighted stock in the Retail Holders and is often viewed as a bellwether for the group. The monthly bars in Chart 3 show that Wal Mart has been in a six-year holding pattern between 65 on the upside and 45 on the downside. Up until early 2003, however, it had been a market leader. In the three years since then (red circle), Wal Mart has been an underperformer (as have most retail stocks). The chart, however, shows the stock rallying from the lower end of the trading range and nearing a test of its 52-week high at 50. A decisive close over that barrier would be a bullish sign for the stock and the rest of the retail sector. Wal Mart is one of the stocks that stands to benefit the most from falling gasoline prices.

Chart 3

ROTATION WITHIN THE DOW SHOWS SHIFT FROM ENERGY TO RETAIL ... The two strongest and weakest stocks in the Dow today show the rotation taking place out of energy and into retail. The Dow's strongest stock is Home Depot (which is the second biggest stock in the Retail Holders). The daily bars in Chart 4 show HD climbing to the highest level in three months. The falling black line shows the Dow's weakest stock which is Exxon Mobil. Notice that the peak in XOM in late August coincided closely with the rebound in Home Depot. When money comes out of one sector, it usually moves into another. It looks to me like a lot of the energy money is moving into retail stocks. That's also giving a big boost the the Consumer Disretionary SPDR.

Chart 4

HOMEBUILDERS CONTRIBUTE TO CONSUMER DISCRETIONARY RALLY ... The strong rally in retail stocks is boosting the Consumer Discretionary SPDR (XLY). Two of the day's top XLY gainers are Best Buy and Circuit City. Chart 5 shows the XLY climbing back over its moving average lines in decisive fashion. Retailers aren't the only stocks boosting the XLY however. Three of the top five XLY gainers were homebuilders which are rallying from a deeply oversold condition. Chart 6 shows that the PHLX Housing Index (price bars) started to stabilize shortly after the 10-year Treasury note yield (green line) started dropping during July. It seems that the recent drops in commodity prices and bond yields are providing a little relief on the housing front. The fact that money is moving into consumer discretionary stocks is giving a boost to the entire stock market.

Chart 5

Chart 6

MARKET EXTENDS RALLY ... With new leadership from retailers, the market staged an impressive rally today. Chart 7 shows the Dow Diamonds (DIA) reaching a new four-month high and nearing a test of its May high at 115.92. Volume is improving. With a lot of help from networking and semiconductors, the Nasdaq hit a new recovery high as well. Chart 8 shows the Nasdaq 100 Shares (QQQQ) nearing a test of their 200-day moving average just above 40.

Chart 7

Chart 8