BROAD DECLINE ROCKS WALL STREET -- DOW BREAKS TRIANGLE -- RETAILERS DRAG XLY AND XRT LOWER -- DOLLAR STORES SHOW RELATIVE STRENGTH -- FINANCIAL STOCKS NOT IMPRESSED WITH PAULSON -- TBILLS REFLECT RISK AVERSION

ANOTHER DOWN WEDNESDAY ... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

What is it with Wednesdays? The Dow Industrials declined for the ninth Wednesday in a row. Of these nine down Wednesdays, the Dow was down more than 2% six times. The Dow was down over 4% four of the last five Wednesdays, including today. While I don't think this Wednesday phenomenon is something we can base trades on, it does reflect extraordinary weakness in the market overall. Chart 1 shows the Dow Industrials breaking triangle support with a sharp decline over the last three days. After a sharp decline in Sep-Oct, the Dow became oversold and this triangle worked off those oversold conditions. There is still a chance for support from the October lows, but the triangle break and bigger downtrend argue for a move to new lows.

Chart 1

The second half of Chart 1 shows the Dow (gray) with On Balance Volume (OBV). I am showing a close-only chart for the Dow because OBV is based on closing prices. Intra-day highs and lows do not matter for OBV. The Dow exceeded its 14-Oct (closing) high in early November, but OBV did not. This amounts to a volume non-confirmation. Joe Granville, the mind behind OBV, asserted that volume leads price. With OBV breaking to new lows over the last two days, this indicator also favors further weakness in the Dow.

RETAILERS WEIGH ON XLY... Consumer discretionary stocks were driven lower for the sixth day running. Chart 2 shows the Consumer Discretionary SPDR (XLY) with six black candlesticks over the last six days. A black candlestick forms when the close is below the open. This means the ETF moved lower after the open and never rebounded -- six days straight. XLY is nearing its October low, but I would not count on support from this prior low.

Chart 2

Retail stocks feature heavily in the consumer discretionary sector and these stocks were pummeled on Wednesday. Chart 3 shows the Retail SPDR (XRT) moving to a new low by plunging over 5%. Even though the ETF is getting oversold again, this is not the group we want to see leading the way lower. As John Murphy pointed out on Monday and Tuesday, relative weakness in cyclical stocks reflects broad weakness in the stock market and the economy. These stocks will lead on any recovery, but fresh lows indicate that we should not expect a recovery any time soon.

Chart 3

RETAIL LEADERS AND LAGGARDS... Believe it or not, there are a few retail stocks holding up. But first, let's look at a couple of key downside leaders. Best Buy (BBY) rattled the retail group by announcing a decline in same store sales. The company noted a drastic change in consumer spending habits from mid September. Chart 4 shows BBY falling 8% on heavy volume. The stock is down over 50% from its highs and testing its October low. Macy's (M) reported an operating loss for the third quarter and announced a sharp cut in capital spending. The stock declined over 10% and moved into single digits over the last few days. Even though a lot of bad news is already priced into these stocks, selling pressure remains intense and we have yet to see any significant basing.

Chart 4

Chart 5

DOLLAR STORES SHOW RELATIVE STRENGTH ... Two retailers stand out in this beleaguered group. Family Dollar Stores (FDO) and Dollar Tree Stores (DLTR) both remain in uptrends. Relative strength in these two reflects changing consumer habits. Cheap is the new chic. Chart 6 shows FDO trading within a rising price channel. The rising 50-day moving average is above the rising 200-day moving average. The bottom indicator shows the price relative, which compares the performance of FDO against the Retail SPDR (XRT). After trading flat from July to September, the price relative broke resistance in October as FDO started outperforming the ETF. Chart 7 shows DLTR with the same indicators. Even though the uptrend is not as pronounced, DLTR is clearly holding up better than the rest of the group and outperforming the Retail SPDR.

Chart 6

Chart 7

XLF BREAKS OCTOBER LOW... The market is getting hit with the toxic combination of a credit freeze and an economic slow down. The charts above reflect economic conditions, while the charts below reflect a financial system still in turmoil. Over the last six trading days, the Financials SPDR (XLF) is down over 20%. There were two big surges in October, but both were wiped out with this decline. Moreover, Chart 8 shows XLF breaking triangle support to signal a continuation lower. Obviously, the financial sector is not impressed with Paulson's new plan. Chart 9 shows Bank of America (BAC) breaking below its July-October lows with a sharp decline the last three days. Chart 10 shows Citigroup (C) dropping over 10% with a move into signal digits. Chart 11 shows Goldman Sachs (GS) hitting a new 52-week low today with a close below 67. All three of these stocks are quite oversold, but remain in the falling knife category with no sign of support yet.

Chart 8

Chart 9

Chart 10

Chart 11

STILL WATCHING THE 13-WEEK T-BILL YIELD... There was lot of talk about the Ted Spread in early October, but this subsided when Libor fell sharply over the last four weeks. Libor is the London Interbank Offered Rate. The Ted Spread is Libor less the 13-week T-Bill Yield. Even though the sharp decline in 3-month Libor ($LIBOR3) was positive for the banking system, the 13-week T-Bill Yield ($IRX) did not follow suit by returning to normal. Libor fell below its July-August levels, but the 13-week T-Bill Yield never got close to its July-August levels. Despite a surge in mid October, the 13-week T-Bill Yield fell back below .5% in late October. The falling yield reflects rising T-Bill prices as money moves into these safe havens. Short-term Treasury Bills are one of the most risk-averse investments out there. The timeframe is short and they are backed by the US government. With a yield of .14% (14 on the chart), these T-Bills pay almost nothing. In fact, the real return, which is adjusted for inflation, is actually negative. Risk aversion is running high when there is strong demand for T-Bills that have little or no return. This is not for stocks, which favor a risk-loving environment.

Chart 12