CONSUMER STAPLES WERE MONTH'S TOP SECTOR -- CONSUMER STAPLE LEADERS -- S&P 500 BULLISH PERCENT INDEX TESTS IMPORTANT CHART SUPPORT -- S&P 500 REGAINS ITS 200-DAY LINE -- FINANCIAL REBOUND STILL HAS A LONG WAY TO GO TO REPAIR RECENT CHART DAMAGE

CONSUMER STAPLES MONTH'S TOP SECTOR... As usually happens when the stock market sells off sharply, money tends to flow to stocks with defensive characteristics. These are stocks that usually fall less during a market downturn -- and, hopefully, even gain ground while the rest of the market drops. The prime example of that category is consumer staples. And, not surprisingly, that was the market's top group over the last month. The Consumer Staples SPDR (XLP) gained 3% while the S&P 500 fell. {Healthcare also held up relatively well]. Chart 1 shows how the XLP did relative to the S&P since the start of the year. In order to demonstate that more clearly, Chart 1 plots the S&P 500 as the zero line (flat line). The XLP (blue line) fluctuates around the S&P zero line. When the blue is above the flat line, the XLP is doing better than the S&P. When the blue line is below the black line, the XLP is doing worse. The blue line jumped relative to the S&P 500 during the market's February/Marchh correction before turning back down again. Since mid-July, however, consumer staples have outperformed the S&P. That makes consumer staples a good place to look if the market downturn continues to worse. One way to do that is through a consumer staple mutual fund or the XLP itself. Another way is to look for individual stocks within the group that are showing upside leadership.

Chart 1

CONSUMER STAPLE LEADERS... Five of the top performing consumer staple stocks over the last month have been Wrigley (+11%), Procter & Gamble (+6%), Kellogg (+5%), Pepsico (+4.4%), and Costco (+4.3%). Charts 2 through 5 show four of them hitting new record highs today. Notice the sharp upturns in their relative strength ratios over the last month. All four stocks had already surpassed previous record highs hit in the 1998-2000 time period. The most recent one to do that is Costco.

Chart 2

Chart 3

Chart 4

Chart 5

COSTO EXCEEDS ITS 2000 PEAK... The daily bars in Chart 6 show Costco breaking through its early July peak to hit a new 52-week high. Its relative strength ratio (bottom of chart) has just done the same. The makes for good absolute and relative performance. It's also a pretty impressive performance in the face of recent market weakness. It gets even better. The monthly bars in Chart 7 show Costco having just broken through its 2000 peak at 58.90. That's a bullish performance. There are two morals to this story. In times of rising market volatily, consumer staples as a group are usually a good place to be. But not all consumer staple stocks are acting equally well. Some are doing much better than others. Like the five shown herein.

Chart 6

Chart 7

BULLISH PERCENT IS AT CRITICAL JUNCTURE... Yesterday's relief rally came at a good time for the stock market. Not only did it keep some market indexes (like the Nasdaq) over its 200-day moving average, it pushed others (like the S&P) back over it. That repaired a lot of the chart damage done last Friday. The next two charts show just important it is that the market hold at this level. Chart 8 is the S&P 500 Bullish Percent Index (BPSPX). The BP line measures the percentage of stocks in an index that are on point & figure buy signals. A few weeks back I pointed out that the BP line was starting to weaken from overbought territory over 70, and warned of the danger of its breaking its early March low. It's at an even more critical spot at the moment. That's because it's testing the reaction lows formed during previous corrections during 2004, 2005, and 2006. I've also explained that moves much below 50 usually signal the onset of a bear market. Chart 9 shows the same measure in a point & figure format. You can see the initial sell signal given at 68 during July. In order to prevent the BPSPX from giving a bear market signal, it's necessary for the market to hold at current levels.

Chart 8

Chart 9

S&P 500 REGAINS 200-DAY AVERAGE ... Yesterday's high volume upside reversal came just in time. A lot of major market indexes had either broken important support levels last Friday or were in danger of doing so. I'm referring mainly to their 200-day moving averages. The good news is that last Friday's chart damage has been repaired somewhat. Chart 10 shows how. The S&P 500 closed back over that important support line yesterday and held it today. Short-term oscillators continue to recover from short-term oversold conditions. The big question now is how much of the trend damage during the month of July is repaired. The Fibonacci retracement lines in Chart 10 show some potential overhead resistance barriers that the S&P 500 needs to clear to signal that recent bounce has some legs. Chart 11 shows the Nasdaq Composite Index bouncing off its 200-day line yesterday. That's what it had to do and it did it. The Commodity Channel (CCI) Index at the bottom of Chart 11 also shows a short-term oversold condition. Now that both indexes have bounced off their 200-day lines, we'll have to see if they have the strength to clear their 50-day lines as well. I kind of doubt it, but we'll be watching.

Chart 10

Chart 11

FINANCIALS BOUNCE ... A strong rebound from a deeply oversold condition in financial stocks was the main catalyst in this week's stock rebound. Chart 12 shows, however, that the Financials Select SPDR (XLF) still has a long way to go to regain the technical damage done to its price chart over the last month. I placed the three Fibonacci retracement lines on the chart, which measure 38%, 50%, and 62% retracements of the July/August losses. Notice that the two lower lines correspond roughly with the March/April lows. The ability of the XLF to surpass those first two lines will help determine whether or not the current bounce is just a reflex rebound or something more lasting. That may also help determine the fate of the rest of the market.

Chart 12