CONSUMER STAPLES SPDR HITS NEW HIGH -- REVIEW OF PAST STAPLE LEADERS -- AND SOME NEW ONES -- COLLAPSING DOLLAR MAKES COMMODITIES TOP ASSET PERFORMER -- WEEKLY MACD LINES ARE STILL NEGATIVE BUT ARE GETTING CLOSE

CONSUMER STAPLE HIGH ... On September 17 I showed the Fidelity Consumer Staples Fund hitting a new high. This week I'm showing the Consumer Staples Select SPDR (XLP) doing the same. Chart 1 shows the XLP trading over its early June intra-day peak at 27.87. It gets even better. The monthly bars in Chart 2 show the XLP also clearing its 2000 peak at 27.25. That puts it at a new record high. In my earlier article I showed some of the big cap leaders in the Fidelity fund hitting new record highs, including Procter & Gamble and Pepsi. I showed Coca Cola hitting a new six-year high. All three stocks have continued to rally since then. I mentioned two other stocks that were close to new highs -- CVS and Colgate Palmolive. Both have broken out since then. Let's take a look.

Chart 1

Chart 2

CVS AND COLGATE REACH NEW RECORDS... The monthly bars in Chart 3 show CVS/Caremark trading at a new record high this week. Its relative strength ratio (bottom of chart) is doing the same. Chart 4 shows Colgate Palmolive also trading at a new record high. Its relative strength ratio, however, (overlaid on the price bars) shows that CL is just starting to outperform the S&P 500 after years of relatively flat performance. There are some possible explanations for that, which apply to the consumer staples group in general. One is this year's rotation away from small and midcap stocks to large caps. Another is the weak dollar which favors large multinationals that derive a large portion of their earnings from overseas markets. A third possible reason is a general caution among investors in the face of a slowing U.S. economy. Consumer staples are relatively immune from a downturn in the business cycle and were this week's strongest sector. A lot of the buying come from the five stocks mentioned above. Some new leaders have emerged in the group over the last week, however. Let's take a look at three of them.

Chart 3

Chart 4

WHOLE FOODS, AVON, AND SYSCO SHOW STRONG GAINS... Whole Foods had the biggest weekly percentage gain in the consumer staple group. Chart 5 shows the stock surging to a new seven-month. Its RS line is rallying as well. Chart 6 shows Avon Products rallying through its 200-day line on Friday. The strongest chart pattern of the three belongs to Sysco Corp. Chart 7 shows the food distributor breaking out to a new eight-month high this week. Its RS line, which had been dropping during the first half of the year, bottomed during July (see arrow) and is still rising. That's symptomatic of the entire consumer staples group.

Chart 5

Chart 6

Chart 7

BUYING SOME DEFENSE... Chart 8 plots the performance of the Consumer Staples SPDR (blue line) against the S&P 500 (flat black line). Plotted that way, we can see how consumer staples have done relative to the broader market. The sharp upturn from mid-July to mid-August reflects the 10% decline in the S&P 500 during that month and investor preference for defensive stocks. The blue line peaked in mid-August as the market started to rally. It has started to rally again over the last week but is still below the zero line. I suspect that investors are turning a bit more cautious as the major market averages approach their yearly highs. Investors are also aware that consumer staples offer the best of two worlds. They allow for participation in the market rally (with several individual stocks hitting new highs). At the same time, they allow protection in case the economy slows and the market rally stalls.

Chart 8

FALLING DOLLAR PUSHES GOLD TO 27-YEAR HIGH ... With the dollar falling sharply again on Friday, gold prices climbed another $10. Gold is now trading at the highest level since 1980 when it peaked near $850. [That 1980 gold peak, by the way, was caused by a major bottom in the U.S. Dollar]. Right now, however, their roles are reversed. The Dollar Index hit a new record low today and shows no signs of bottoming (Chart 10). That's very bullish for gold, oil, wheat, and most other commodities. For the month, the Reuters/Jefferies CRB Index gained nearly 10% and was the strongest asset class. Stocks came in second with a monthly gain of 4.4% (using the S&P 500 through Thursday). Bonds were about unchanged. But the Dollar Index lost 3%. For the entire year, commodities are now the top asset class, while the dollar is the weakest. One of the cardinal rules of intermarket analysis is that a falling dollar is bullish for commodity markets, and gold in particular. From a macro standpoint, those two trends complicate the work of the Fed. Can the Fed be expected to lower rates again in the face of a collapsing dollar? Can it avoid raising rates in the face of surging commodity prices which is potentially inflationary? Those of course are economic questions. Our job is to take what the markets give us. Right now, they've giving us profits in commodities and foreign currencies. And consumer staples.

Chart 9

Chart 10

WEEKLY MACD LINES ARE GETTING CLOSE... On Tuesday, I referred to an August 31 Market Message that discussed weekly MACD lines. It's time for an update on that indicator. Chart 11 plots the "weekly" MACD lines on weekly bars for the S&P 500. Intermediate-term signals are given when the faster black line crosses above or below the slower red line. The chart shows five signals since the start of 2006. Sell signals were given in May 2006, February and July 2007. The two earlier sell signals were reversed to buy signals in August 2006 and April 2007. At present, the two lines are coverging but have not yet turned positive. But they're getting close. The histogram bars along the bottom of the chart measure the distance (or spread) between the two MACD lines. Histogram crossings above and below the zero line mark buy and sell signals (and coincide with MACD crossings). The real value of the histogram bars is that they tell us when upside and downside momentum is easing well before actual signals are given. That's why I remarked on August 31 that an upturn in the histogram bars during August didn't constitute a buy signal (except for short-term traders), but justified covering existing short positions. Although daily MACD lines (which measure the short-term trend) have been positive for more than a month, we need to see a positive crossing by the weekly lines (or a histogram move over zero) to confirm that the current rally has enough strength to move to new highs.

Chart 11