CONSUMER STAPLES SPDR HITS 2008 HIGH --PROCTER & GAMBLE IS A DEFENSIVE LEADER -- RAIL SELLING WEAKENS THE TRANSPORTS --JP MORGAN FALLS 10% TO LEAD FINANCIALS AND THE MARKET LOWER

CONSUMER STAPLES SPDR TURNS UP ... Despite recent signs of improvement in economically-sensitive groups like consumer disretionary stocks, investors still show a preference for more defensive consumer staples. These are stocks that do okay in good times and bad and don't rely on the state of the business cycle. Chart 1 shows the Consumer Discretionary SPDR (XLP) having broken through its spring highs to reach a new 2008 high. Its relative strength line (below chart) turned up during May (when the market last started rolling over) and has been rising since then. The monthly bars in Chart 2 show the XLP nearing a test of its record high reached at the end of last year. The solid line is the XLP:SPX relative strength ratio. Its trend is very instructive. The rising ratio between 2000 and the end of 2002 coincided with falling stocks. The drop in the ratio from late 2002 to the middle of 2007 coincided with rising stocks. The ratio is now at the highest level in five years. That suggests that investors aren't convinced that the market has bottomed.

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STAPLE LEADERS ... The next three charts caught my eye because they've been among the strongest percentage gainers in staples group and they have strong chart patterns. All three have either cleared their June peak or are close to doing so. And all three sport rising relative strength lines. Chart 5 shows Sysco in the process of testing its May/June peak. All three stocks are also trading over their 200-day averages. Since all three are involved in the distribution or production of food, it's possible that they're getting a boost from the recent sharp drop in food commodities. Procter & Gamble is one of the biggest stocks in the staples group. Chart 6 shows the stock rising both in absolute and relative terms.

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ROTATION FROM RAILS TO AIRLINES... Transportation stocks have been among the strongest groups during 2008. The rising relative strength line in Chart 6 attests to that. That chart also shows, however, that the May peak in the transports failed a challenge of the June 2007 high. The transports are one of today's weakest groups. Most of the selling is coming from rail stocks which had been the strongest part of this group. The airlines, however, have gone from transportation laggards to leaders. Chart 7 shows the Dow Jones US Railroad Index falling more than 4% today (and on heavy volume). Two of the day's biggest losers are Union Pacific and CSX. By contrast, airlines are rising. The three strongest stocks of the day are AMR, Continential, and JetBlue. Chart 8 shows the Airlines Index having reached its 200-day moving average. The recent airline rally is tied to falling oil prices. Although airline buying is helping to offset some of the rail selling, the fact is that rails have a much heavier weighting in the Dow Transports. That being the case, any serious downturn in the rails could have a depressing effect on the Dow Transports.

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DOW COMPLEX MAY LOSE TRANSPORTATION LEADERSHIP ... Chart 10 show that the utilities (blue line) rolled over in early July and have become the weakest part of the Dow complex. The transports had been the strongest. In today's trading, however, the transports are the biggest losers (thanks to the rails). The black line suggests that the transports may be about to roll over as well. That would have a depressing impact on the Dow complex. Chart 11 shows the Dow Jones Composite Index (which includes all 65 Dow stocks) falling nearly 2% today. That selling has put the DJA back below its 50-day moving average and puts the recent bounce in jeopardy. Most of the selling in the industrials came from the financials. The biggest loser was JP Morgan. Chart 12 shows JPM falling 10% on rising volume. In so doing, it failed a test of its 200-day average and closed back below its 50-day line. The financial sector lost 5% and helped pull the rest of the market lower.

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