HOME DEPOT, TARGET, AND WAL MART WEAKEN RETAILERS -- SCHERING PLOUGH ACHIEVES HEALTHCARE BREAKOUT -- MAXIM INTEGRATED PRODUCTS PULLS SOX LOWER -- SCHLUMBERGER BREAKS OUT

RETAIL STOCKS ARE STARTING TO UNDERPERFORM ... With all the recent bearish news on housing, combined with rising oil prices, odds for an economic slowdown have increased. Recent economic reports show that business investment has been declining for several months. That leaves the consumer to keep the economy afloat. That being the case, it shouldn't go unnoticed that retail stocks are starting to underperform the market. Chart 1 shows the S&P Retail Index failing a test of its 50-day average and starting to roll over again to the downside. Maybe even more important is the fact that its relative strength ratio (top of chart) has been falling for the last month. That means that investors have started to discount the retailers. Chart 2 paints an even bleaker picture. It compares the Retail/S&P ratio (black line) to the S&P 500 (green line) over the last four-year bull cycle. Retailers led the market higher from 2003 to the middle of 2005. Since then, retailers have been lagging behind. The black arrow in Chart 2 shows that the last downturn in the retail/S&P ratio started from a much lower level than in 2005. Relative weakness in retail stocks may be hinting at some loss of momentum in retail spending. That wouldn't be good for the market or the economy.

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Chart 2

HOME DEPOT AND WALMART SUFFER THE MOST ... Two of the reasons for the relatively weak retail group are Home Depot and Wal Mart. [Those two stocks are the biggest holdings in the Retail Holders (RTH)]. Both have been terrible performers over the last year, but possibly for different reasons. Chart 3 shows Home Depot slipping below its 200-day moving average (red line). Its relative strength ratio has fallen to a new yearly low. The solid line in Chart 3 is the PHLX Housing Index (HGX). It should come as no surprise to see a home improvement stock like HD being closely correlated to, and being pulled down with, the homebuilding group. The main problem with Wal Mart may be rising oil prices. Chart 4 overlays Wal Mart with crude oil prices (black line). A clear inverse relationship exists between the two over the last year. The rally in WMT last summer coincided exactly with an oil peak (see arrows). The latest downturn in the stock followed an upturn in oil. No doubt other retailers are starting to suffer from the same two problems.

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TARGET STARTS TO ROLL OVER ... Target is a retail stock has been a market leader for the last seven years. It hit a record high in February before starting to weaken with the rest of the retail group. The daily bars in Chart 5 show Target trading well below its 50-day moving average. More importantly, its relative strength ratio (top of chart) has been falling since the start of March (blue arrow). Chart 6 overlays the TGT/S&P ratio (blue line) on the price of Target for the last four years. Here again, the recent peak in the ratio has fallen short of its 2005 peak. That shows gradual loss of market leadership even from this retail leader. Economists who seem confident about the staying power of consumer spending might want to keep an eye on weakening retail stocks. Stocks have a way of discounting (or leading) fundamental developments.

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SCHERING PLOUGH IS HEALTHCARE LEADER ... Investors have been showing a preference for large defensive stocks during the first quarter. That includes consumer staples, telecom, and utilities (not to mention energy). Another traditionally defensive group is healthcare. As a group, it hasn't done much this year. But some individual healthcare stocks are starting to show up on our chart radar. On Monday, I showed Abbott Labs breaking out to a new record high. Another potential leader in the same group is Schering Plough. The daily bars in Chart 7 show the stock closing over its January high today. Its relative strength ratio (top of chart) did the same. The weekly bars in Chart 8 show the stock hitting the highest level (25) since it bottomed in the middle of 2003 at 14. What caught my eye in Chart 8 is the fact that its relative strength ratio (solid line) is on the verge of a bullish breakout of its own. That would be a bullish development. The monthly bars in Chart 9 shown that even at a four-year high, SGP has regained only 25% of its fall from 2000 to 2003. Its relative strength ratio, which bottomed in 2003, has been trading sideways for nearly four years and appears on the verge of establishing a new uptrend. If you're looking for another potential leader in the defensive healthcare group, Schering Plough may be a good choice.

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MXIM PULLS CHIP GROUP LOWER ... The market shrugged off earlier losses today to close modestly higher in lighter trading. The major indexes, however, remain below their 50-day moving averages. The day's smallest gain was in the Nasdaq. That was mainly due to a sharp drop in semiconductors. The main reason for that was a 2.3% drop in Maxim Integrated Products. Chart 10 shows the stock tumbling below its 200-day average to the lowest close in more than four months. And on heavy volume. MXIM was also the biggest percentage loser in the Nasdaq 100. Chart 11 shows the Semiconductor Holders (SMH) also closing below its 200-day moving average. This remains one of the market's weakest industry groups.

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LOCATION IS EVERYTHING ... Just as in real estate, the name of the game in the stock market is "location". Even in times of relative indecision (like now), the market has a way of offering us clearcut trends to profit from. It's no secret that one of the problems bothering the market is the continuing rise in oil prices. Rising energy prices keep the Fed focused on inflation and makes it more difficult for it to lower rates to offset a weakening housing sector. At such times, it's a good idea to take what the market offers. The strongest market sector today, and since the start of the year, has been energy. I've shown a number of individual energy stocks achieving bullish breakouts (not to mention energy ETFs). Here's another one. Chart 12 shows Schlumberger closing over 70 for the first time since last May. That's a bullish breakout. Its relative strength ratio (top of chart) has broken an eight-month down trendline (black arrow). Most of the market's stock uptrends right now are found in the energy patch. That's a good place to have some money located.

Chart 12