QQQQ AND IWM MANAGE TO FIRM -- CONSUMER DISCRETIONARY SPDR AND RETAIL SPDR RECORD NEW LOWS -- GOLD SURGES AS DOLLAR SAGS - SECTOR PERFORMANCE SINCE THE OCTOBER AND MAY HIGHS

TO BOUNCE OR NOT TO BOUNCE... Today's Market Message was written by Arthur Hill. John Murphy will return next week. - Editor

The major indices surged on Tuesday, pulled back sharply on Wednesday and then firmed on Thursday. Needless to say, there is a serious tug-o-war underway between oversold forces and the bigger downtrend. First and foremost, John Murphy and I consider this a bear market. As such, advances are counter-trend moves against a tough bearish headwind. A counter-trend advance could last a few days or a few weeks. We could even see a flat consolidation to work off oversold conditions. Counter-trend moves are difficult to time and predict. And don't forget, earnings season starts next week and this should add to the volatility. Having said that, there are signs the market is trying to bounce-again. Charts 1 and 2 show StochRSI moving above .50 for the Nasdaq 100 ETF (QQQQ) and Russell 2000 ETF (IWM). QQQQ formed a harami over the last two days. This is a bullish candlestick reversal that requires confirmation with further strength. Follow-through with a break above the July highs would be positive for QQQQ. IWM is firming just above the March low and a counter-trend bounce could extend to 69-70 (yellow area).

Chart 1

Chart 2

RETAIL STOCKS GET HAMMERED... A number of retail sales reports were issued on Thursday and many retail-related stocks were down sharply. Retail is a very important group. First, retail stocks are key components of the consumer discretionary sector, which is the most economically sensitive sector. Second, retail spending drives 2/3 of GDP, which is important to the economy. In general, the stock market is in good shape when retail stocks lead and in bad shape when retail stocks lag. Currently, retail stocks are lagging the stock market and this is negative overall.

Chart 3 shows a performance chart with the S&P 500 ETF (SPY), Retail HOLDRS (RTH), Retail SPDR (XRT) and Consumer Discretionary SPDR (XLY). This chart extends back to 19 May, which is when SPY peaked. XRT and XLY are down much more than SPY over this time frame. RTH is holding up better than SPY, but that is due to the Wal-Mart (WMT) effect. WMT accounts for over 20% of the Retail HOLDRS and Wal-Mart is one of the few retailers holding up. Strength in WMT kept RTH afloat. Chart 4 shows this same performance chart with Wal-Mart added to the mix. WMT is basically unchanged since 19 May and holding up much better than the other four.

Chart 3

Chart 4

NEW LOWS FOR XRT AND XLY... Charts 5 and 6 show the Retail SPDR (XRT) and Consumer Discretionary SPDR (XLY) breaking to new 52-week lows. While new 52-week lows are bearish in and of themselves, they often occur when securities are oversold. XLY is down 20% from its 19 May high and clearly oversold. The Commodity Channel Index (CCI) has been below zero since the third week of May, or seven weeks. Despite these oversold conditions, the ETF cannot seem to bounce and remains in the falling knife category. XRT is in the same boat: overdue for a bounce, but showing no signs of strength. Chart 7 shows the Retail HOLDRS (RTH) as it closes in on support from the January-March lows.

Chart 5

Chart 6

Chart 7

DOLLAR SAGS AND GOLD SURGES... There was renewed interest in gold today as the U.S. Dollar Index ($USD) declined and oil surged. Chart 8 shows the streetTRACKS Gold ETF (GLD) finding support near the May lows and 200-day moving average in mid June. The ETF then surged above resistance at 90 with a rather sharp advance the last four weeks. This move broke the March trend line and the mid June highs, which then turned into support around 90. A move back below 90 would question bullish resolve. Chart 9 shows the U.S. Dollar Index pulling back over the last two days. This two-day decline is rather mild and the index remains above support from the May-July lows. A break below these lows would open the door to further weakness in the greenback.

Chart 8

Chart 9

A BEAR MARKET DEFINITION... Officially, a bear market is signaled when a major index declines 20% from its high. This could be the S&P 500, Dow or Nasdaq. We could debate bear market definitions until the wee hours, but I would like to offer more evidence that we are indeed in a bear market. As noted above, the S&P 500 peaked on 19 May and declined sharply over the last 7-8 weeks. What's remarkable about this decline? Chart 10 shows a Sector SPDR PerfChart extending back to 20 May. All sectors are down during this time frame. Six of the nine sectors are down over 10%. The Consumer Discretionary SPDR (XLY) and the Financials SPDR (XLF) are the weakest of the nine. The Consumer Staples SPDR (XLP), Utilities SPDR (XLU) and Consumer Staples SPDR (XLP) lost the least. No sectors were left unscathed. This is important information. Bear markets can affect 80% or more of the stock market. It is called a bear market because virtually the whole market is affected.

Chart 10

THE 20% CLUB... Just to test the 20% thesis, I am including the same Sector SPDR PerfChart extending back to 9 October, which is when the S&P 500 peaked in 2007 (Chart 10). The index is down over 20% since its October high. Two sectors are also down over 20% (XLY and XLF). Another pair of sectors is down over 19% and within a spitting distance of the 20% club (XLK and XLI). The Energy SPDR (XLE) and the Utilities SPDR (XLU) are the only sectors holding on to gains since October. However, as noted in the PerfChart above, even these two sectors succumbed to selling pressure on the latest leg lower.

Chart 11