RETAIL HOLDERS NEAR RECORD HIGH -- GAP HITS 52-WEEK HIGH BUT STILL LOOKS CHEAP -- TARGET AND KOHLS ARE RETAIL LEADERS -- RISING DOLLAR KEEPS COMMODITIES UNDER PRESSURE

RETAIL HOLDERS ARE TESTING 2005 HIGHS... A lot of attention has been paid lately to upside breakouts by the Dow Industrials to record highs and the S&P 500 to a five and half year high. Chart 1 shows a market group that may be on the verge of a bullish breakout of its own. The red line is the Retail Holders (RTH) which have become one of the market's hottest groups over the last two months. The chart shows the RTH having just cleared its 2006 high and right up against its 2005 peak. A close over that level would put the RTH at a new record. The relative strength ratio (blue line) shows that the RTH started to exert market leadership during August (black circle) when oil prices and bond yields started to drop sharply. Retail stocks benefit from both of those trends.

Chart 1

RETAIL LEADERS ... A number of retail stocks have already reached record highs including Nordstrom, Federated, and TJX. I looked for a few others that hadn't reached that milestone yet. The weekly bars in Chart 2 show Target moving up to challenge its 2005 highs around 59. The rising TGT/RTH ratio line shows that Target has become an upside leader in the retail group. The next retail stock has further to go to reach a new record.

Chart 2

KOHLS SHOWS NEW LEADERSHIP ... The monthly bars in Chart 3 put the recent uptrend in Kohls in perspective. Although the stock has already reached a four-year high, it appears headed for a challenge of its old record high reached in mid-2002 at 78.83. The KSS/RTH ratio (below the chart) shows the stock emerging as a retail leader during 2006 after three underachieving years. The third retail stock is the cheapest of the three shown here.

Chart 3

GAP STILL LOOKS CHEAP ... I'm using the next two charts to demonstrate why it's important to look at different time frames when considering a stock. The daily bars in Chart 4 show Gap having broken through its 2006 peak to reach a new 52-week high. The GPS/RTH ratio has jumped sharply over the last month and is also on the verge of a 52-week high. Some will look at the upside breakout and declare the stock "too high" to buy. A glance at the weekly bars in Chart 5, however, presents a totally different view. They show Gap having just broken out of a year-long bottom to achieve a new 52-week high. The stock has also just broken a two-year downtrend line starting in the middle of 2004. Recent upside volume has been impressive. And the GPS/RTH ratio is starting to turn up for the first time in a year. While several retailers are trading at or close to record highs, the Gap is still trading 60% below its 2000 high. In my view, that makes it cheap.

Chart 4

Chart 5

ENERGY SPDR STILL IN TRADING RANGE ... One of our readers asked if the Energy SPDR (XLE) had formed a "double top". The answer is "not yet". The reason for the question is clear. The daily bars in Chart 6 show two prominent peaks at the same level in the XLE during May and August (see black circles). Since then, the XLE has fallen back to its March/June lows (black line)and has bounced a bit. So far, all we can say is that the XLE is in a trading range between its 2006 highs and lows. To qualify as a "double top", the XLE would have to break its 2006 low. Energy stocks bounced today on a brokerage upgrade although oil prices fell more than a dollar to end below $59. From an intermarket perspective, it's worth noting that the second XLE peak in August coincided with a peak in oil prices and started the rotation into retail stocks. Right now, the XLE is testing chart support at the same time that the Retail Holders are testing overhead resistance. That suggests that energy stocks may be oversold at the same time that the retailers are a bit overbought. Having said that, the longer-term trend appears to favor retailers over energy stocks.

Chart 6

RTH/XLE RATIO TURNS UP ... I've been using a lot of ratio charts lately to show how different market groups are doing relative to one another. To create a ratio, all you have to do is divide one market index by the other. In Chart 7, for example, I'm dividing the Retail Holders (RTH) by the Energy SPDR (XLE). The symbol for that is RTH:XLE (the two symbols with a : in between). That creates a ratio, or relative strength, chart. It enables us to study the relationship between any two markets. The RTH:XLE ratio in Chart 7 turned up in August (when oil peaked). Since then, retailers have done much better than energy with the ratio recently hitting a new 2006 high. Chart 8 shows the ratio breaking a major downtrend line. That means that retailers are outperforming energy stocks for the first time in three years. You can apply trendline and moving average analysis right on the ratio lines (as well as other technical indicators). It's a great charting tool. You should learn how to use it.

Chart 7

Chart 8

DOLLAR CONTINUES TO RALLY ... The U.S. Dollar rose again today against most major foreign currencies. The yen hit a new 2006 low versus the dollar. Chart 9 shows the Canadian Dollar threatening to break its 200-day moving average. I've suggested before that the CDW is being hurt by falling commodity prices and a rising U.S. dollar. That combination is keeping commodity prices under pressure. Most commodity markets fell again today. Chart 10 shows the streetTracks Gold Trust Shares (GLD) still testing their June lows.

Chart 9

Chart 10