CONSUMER DISCRETIONARY AND SMALL CAPS HAVE STRONG DAY -- GOLD BREAKS MAJOR SUPPORT -- S&P 500 CLEARS 50-DAY LINE -- RECENT UPSIDE LEADERSHIP INCREASES ODDS THAT MARKET IS BOTTOMING -- US MARKET IS NOW OUTPERFORMING FOREIGN SHARES

RETAIL BUYING BOOSTS CONSUMER DISCRETIONARY STOCKS ... On Friday, I wrote about signs of improvement in the consumer discretionary sector which has been benefiting from falling oil prices. I suggested that most of the improvement was coming from homebuilders and retailers. That was certainly true today with both groups having very strong days. Chart 1 shows the Consumer Discretionary SPDR (XLY) surging 3% to challenge its 200-day average. Its relative strength line (below chart) exploded to a new 2008 high. That's a good sign for the sector and the rest of the market. Retailers were the day's stars. Chart 2 shows the S&P Retail Index jumping nearly 5% and trading above its 200-day averge. Its RS line surged as well. Several individual retailers had very strong chart days.

Chart 1

Chart 2

RETAIL LEADERS ... The next four charts show the impressive combination of price and volume gains in four retailers. Chart 3 shows Amazon.com breaking out to a seven-month high. Very impressive. Charts 4 shows Home Depot clearing its 200-day line on strong volume. Charts 5 and 6 show Gap and Kohls doing the same. I wrote in a recent message that upside leadership by retailers was a necessary ingredient in a market bottom. That makes today's strong action a positive step for the entire market. So is the strong action in small cap stocks.

Chart 3

Chart 4

Chart 5

Chart 6

SMALL CAPS NEAR JUNE HIGH ... Small cap leadership is another important ingredient in a market bottom. That's why Chart 7 is an encouraging sign. It shows the Russell 2000 iShares (IWM) trading well above its 200-day average and nearing a test of its June high. And it's doing so on rising volume. That's a very important test for this group and the entire market. Any close above the June high (after July's successful test of its January/March lows) would signal a major bottom in small caps. That's would be a big plus for the market as a whole. As I suggested on Friday, small caps may be getting a big boost from the bullish breakout in the U.S. Dollar that took place last week.

Chart 7

GOLD BREAKS MAJOR SUPPORT ... Commodity markets are being hurt by the rising dollar. That's especially true of gold which has a strong inverse link to the greenback. I recently showed the Market Vectors Gold Miners ETF (GDX) breaking previous lows formed during 2008 (Chart 8). Chart 9 shows the streetTracks Gold Trust ETF (GLD) doing the same today. Volume has also been heavy on the downside in both markets. The green line on Chart 9 shows the US Dollar breakout coinciding with the gold breakdown. Heavy selling of gold and gold shares shows new confidence in the dollar and the U.S. stock market. Commodity exporters like Brazil and Canada, however, lost more ground today (Charts 10 and 11). The EWC is also being hurt by a falling Canadian Dollar.

Chart 8

Chart 9

Chart 10

Chart 11

S&P 500 CLEARS 50-DAY LINE ... The Dow Industrials cleared their 50-day average on Friday. The S&P 500 did so today (Chart 12). That's just another sign that the short-term trend has turned higher. The Nasdaq is acting even better. Chart 13 shows the Nasdaq Composite Index closing right on its 200-day line. Not surprisingly, I've received a lot of e-mails asking if the market has hit bottom. The fact is that it's too early to tell. I will say, however, that the recent downturn in commodity markets and the corresponding upturn in airlines, consumer discretionary stocks, technology, and small caps increase the odds that the market may have started a major bottoming process. That's because those groups usually lead at market bottoms. The usually dangerous months of September and October lie ahead. But the market is certainly starting to act a lot better. A potential bottom in homebuilding stocks that I alluded to on Friday would be a another big plus for the market.

Chart 12

Chart 13

US STOCKS ARE NEW GLOBAL LEADERS... I wrote on Friday that the bottom in the U.S. Dollar would reverse the flow of funds to foreign stocks that occurred over the past several years. That appears to be happening. Chart 14 plots a ratio of the S&P 500 SPDRs (SPY) by EAFE Index iShares (EFA) for the last three years. The falling ratio showed that foreign stocks were stronger performers than the U.S. That's no longer the case. The SPY/EFA ratio has broken out to a new twenty-month high. That makes the U.S. the new stock market of choice.

Chart 14