BROAD MARKET UP -- SECTORS MIXED -- NASDAQ AND RUSSELL 2000 LEAD THE WAY -- RETAIL HOLDRS BOUNCE -- WAL-MART CHARGES TO RESISTANCE -- CLARIFYING PERFCHART SETTINGS

MARKET RALLIES WITH MIXED PARTICIPATION... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

The major indices moved higher on Wednesday, but participation was mixed. A run through the AMEX Select Sector SPDRs on the Market Summary page shows four sectors gaining ground and five sectors losing ground. The energy, consumer discretionary, industrials and technology sectors led the way higher. However, these gains were muted by small losses in the materials, healthcare, consumer staples, financial and utility sectors. The sectors are clearly not on the same page and this detracts from the current advance. It shows a rather narrow advance with limited participation, which is not a good sign.

Chart 1

TECHS AND SMALL-CAPS LEAD ADVANCE... The Nasdaq and the Russell 2000 both gained over 2% to lead the broad market indices. Even though the long-term trend is down, there will be counter-trend advances along the way. Technically, the long-term trend can be considered down because the 50-day moving average is below the 200-day moving average and the 200-day moving average is falling. The Nasdaq's 200-day moving average turned lower in the second half of January. In addition, Charts 2 and 3 show both indices breaking major support levels in January. These broken supports now turn into resistance. A corrective rally could extend to these resistance zones, perhaps even higher. For a corrective or counter-trend rally, I would expect a peak below the December highs. In other words, I would expect a lower high to form.

Chart 2

Chart 3

RETAIL HOLDRS BOUNCE OFF SUPPORT... An unexpected rise in retail sales for January helped the market today. Despite this positive news, the Retail HOLDRS (RTH) lagged the broader market with a relatively small gain. Chart 4 shows a long-term view with the Retail HOLDRS (RTH) bouncing off support over the last few weeks. The ETF established support around 85 with three bounces over the last 2 and a half years. While the current bounce off support looks impressive, the ETF remains below the 40-week moving average and below the trend line extending down from the July high. In other words, the bounce looks like a corrective advance within a bigger downtrend. Chart 5 shows daily candlesticks for the Retail HOLDRS. The ETF is meeting resistance around 94-96 with a bearish engulfing pattern in early February.

Chart 4

Chart 5

WAL-MART CHARGES INTO RESISTANCE... Wal-Mart, the largest component in the Retail HOLDRS, has been one of the top performing stocks over the last 4-5 months. Chart 6 shows WMT with the price relative in the bottom indicator window. Relative to the S&P 500, WMT started outperforming in October when the price relative turned up (green arrow). The indicator is now near its 2006 highs and WMT continues to show relative strength. Despite recent relative strength, the stock has been locked in a trading range the last few years. WMT bottomed at support around 41-42 and then shot to resistance around 50-51. Even though the stock is showing good relative strength, this resistance zone looks formidable and could stall the advance.

Chart 6

Before leaving WMT and the Retail HOLDRS, I would like to point out relative weakness in RTH. Chart 7 shows Wal-Mart (green), the Retail HOLDRS (black) and the price relative. WMT surged above its 2007 high this year, but the Retail HOLDRS remains well below its high. Despite leadership from its biggest component, the Retail HOLDRS is not keeping up. This tells me that the other components are keeping the ETF down and seriously underperforming Wal-Mart.

Chart 7

CLARIFICATION ON PERFCHARTS... There was some confusion with the Sector SPDR PerfChart I showed last week. This confusion centered on the issue of relative performance versus absolute performance. Chart 8 shows the SPDR PerfChart based on relative performance. Notice that the S&P 500 is highlighted in the upper left corner. You can click on the tabs to highlight or un-highlight them. A highlighted S&P 500 tab means that sector performance is measured against the S&P 500, not on an absolute basis. The first bar shows the S&P 500 at 0% because it is the base index. The second bar shows the Consumer Discretionary SPDR (XLY) at --1.17%, which means it is down more than the S&P 500 over the given time frame. On an absolute basis, the S&P 500 is down 13.67% and XLY is down 14.85%. XLY is down more than SPX and this shows relative weakness. For a second example, the orange bar shows the Utilities SPDR (XLU) at +12%, which means the ETF is outperforming the S&P 500. On an absolute basis, XLU is down 1.67% over this time frame and S&P 500 is down 13.67%. XLU is outperforming because it is down less than SPX.

Chart 8

For reference, Chart 9 shows the same Sector SPDR PerfChart with an un-highlighted S&P 500 tab. This shows absolute performance for all nine sectors and the S&P 500. Notice that all lost ground from 10 Oct to 12 Feb. The S&P 500 declined 13.67% and I drew a black horizontal line to mark this level. The Consumer Discretionary SPDR (XLY), Technology SPDR (XLK) and Finance SPDR (XLF) all dipped below this black line and declined more than the S&P 500. This shows relative weakness. The other five held above the black line to show relative strength.

Chart 9