ECONOMIC REPORTS CLOBBER STOCKS -- SPY FILLS MONDAY'S GAP -- DOW REMAINS OVERSOLD -- RETAILERS TAKE A DIVE -- OIL HITS NEW LOW -- U.S. DOLLAR INDEX GAINS

STOCKS HIT WITH TRIPLE WHAMMY ... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

Bailout hopes gave way to economic realities as stocks were broadsided with selling pressure on Wednesday. First, the Commerce Department reported a sharp decline (1.2%) in September retail sales, which was the third consecutive monthly decline. Second, in a speech to the Economic Club of New York, Fed Chairman Bernanke noted that the credit freeze will take time to thaw and the economic recovery will not happen immediately. In other words, you can lead the banks to money, but you cannot make them lend. Third, the Fed's Beige Book reported a slow down in economic activity across all 12 Federal Reserve districts. Stocks were vulnerable after Monday's big surge, but the scope of today's decline suggests more than just a pullback. Chart 1 shows a section from the Market Summary. The major indices were all down over 8%, while all nine sector SPDRs were down 7% or more.

Chart 1

SELLING INTO THE CLOSE... Another negative sign, selling pressure intensified into the close on Wednesday. Chart 2 shows the S&P 500 ETF (SPY) with 30 minute candlesticks. The ETF gapped up on Monday and surged above 100 with a huge advance. After a modest decline on Tuesday, the ETF gapped down today and declined the entire day. There were some periods of firmness, but no signs of buying pressure the entire day. Selling pressure kicked in again in the final hour and SPY closed below Friday's close to fill the gap. A strong gap should hold and the inability to hold this gap shows weakness.

Chart 2

DOW REMAINS OVERSOLD ... Chart 3 shows weekly candlesticks for the Dow Industrials over the last two years. After peaking in October 2007, the Dow embarked on a rather orderly decline the next 10 months by forming a falling price channel (blue trend lines). The Dow broke support around 11800 in June and broken support turned into resistance in August. With a break below the lower channel trend line, the decline accelerated and RSI became oversold. Even though the Dow looks oversold, RSI is trending lower and momentum remains bearish overall. Chart 4 shows daily candlesticks with the Commodity Channel Index (CCI). This momentum oscillator became oversold at least four times in the last two months. More importantly, it has remained below the zero line since early September. This is testament to the shear strength of the current downtrend. A break above the zero line would be positive and further strength above +100 would turn momentum bullish. Monday's big surge in the Dow was impressive, but it will take some follow through to impress the Commodity Channel Index (CCI).

Chart 3

Chart 4

RETAILERS MOVE SHARPLY LOWER... With the decline in retail sales, it would be natural to assume that retail stocks led the market lower. Indeed, the retailers were among some of the hardest hit. However, hard hits were not limited to just retailers. Many industry groups were down over 5%. Of some 200 industry groups, the only groups sporting gains today were Soft Drinks (KO), Gaming Activities (BYI) and Southeast Regional Banks (RF). Estimates suggest that retail spending drives 2/3 of the GDP. It goes without saying that a decline in retail sales would affect most of the economy and few industries are immune to a broad economic slow down. Chart 5 shows the Retail HOLDRS (RTH) in 2008. With Wal-mart (WMT) as its biggest component, the ETF held up well and moved to its highest levels of the year in September. My how things change. RTH fell from 100 to 70 (-30%) in just five weeks. In the process, the ETF gapped down in early October and recorded a 52-week low. The only thing positive to mention is the severe oversold condition. New 52-week lows are bearish and rarely mark single events. In other words, more new 52-week lows are likely as the downtrend matures. Chart 6 shows similar characteristics for the Retail SPDR (XRT).

Chart 5

Chart 6

The next group of charts shows selected retailers over the last 12 months. I am using bar charts with a 5-day EMA (blue line) to smooth the volatility. Chart 7 shows Wal-Mart (WMT) fluctuating wildly over the last three days, but the 5-day EMA barely budged and moved lower the last two days. Chart 8 shows Best Buy (BBY) breaking down in September and hitting new 52-week lows over the last few days. Target (TGT) led the market higher in August, but peaked in September and hit new 52-week lows in October (Chart 9). Apparel retailer Abercrombie & Fitch (ANF) stalled at the beginning of the year and then began a relentless decline in June (Chart 10). These declines are not normal bull market pullbacks. They are bear market declines. Even though retailers are oversold and ripe for a bounce, the big trends are down and rallies will likely give way to more selling pressure.

Chart 7

Chart 8

Chart 9

Chart 10

FALLING OIL BOOSTS THE DOLLAR... The United States Oil Fund ETF (USO) dropped sharply as concerns over the economy took center stage today. A weakening economy means less demand for oil and less demand puts downward pressure on oil prices. The stock market is a leading indicator that usually precedes the economy by 3-6 months. SPY peaked in October 2007 and was down around 20% by mid July. As chart 11 shows, the United States Oil Fund ETF held up longer than SPY as it hit a new high in mid July. However, this new high did not last long. USO made up for lost ground in a hurry and hit a new 52-week low with a gap down today. Chart 12 shows the U.S. Dollar Index ($USD) moving counter to oil with a big breakout in August. More recently, the index held its resistance breakout around 80 and moved higher today. The big trend is up for the greenback and falling oil prices are helping.

Chart 11

Chart 12