SMALL-CAPS AND TECHS REBOUND -- WARNING HITS WAL-MART -- RETAIL HOLDRS FAIL AT RESISTANCE -- WAL-MART WEIGHS ON CONSUMER STAPLES SPDR -- POCKETS OF STRENGTH AMONG RETAILERS - BONDS FIRM AHEAD OF EMPLOYMENT REPORT

STOCKS FIRM AFTER WEAK OPEN... Today's Market Message was written by Arthur Hill. - Editor

The Wal-Mart warning reverberated throughout the stock market as the major indices opened lower on Thursday. Despite this lower open, trading quickly turned mixed and most of the major-index ETFs ended with small gains. The Russell 2000 (small-caps) and Nasdaq (techs) led the way higher, while the Dow Industrials lagged with a fractional loss. Chart 1 shows the Dow Industrials ETF (DIA) with a choppy advance since early December. The ETF first surged above 88 on 28 November and closed at 87.43 today (8 January). Actually, the ETF has gone nowhere the last five weeks. Even so, the reversal off the November low is holding and there is a slight upward bias over the last five weeks. It ain't pretty, but the bulls are still putting up a pretty good fight right now. Watch support from the late-December lows for signs of a breakdown. Chart 2 shows the Russell 2000 ETF (IWM) with a rising wedge since late November. The advance here is more pronounced than the advance in DIA. Perhaps more importantly, small-caps are showing some relative strength as the price relative rises. The bottom indicator shows the price relative (IWM:DIA ratio).

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WAL-MART SINKS AFTER WARNING... Wal-Mart (WMT), the nation's largest retailer, warned of weak December sales and lowered guidance today. Wall Street showed no mercy. Chart 3 shows WMT breaking rising channel support with a gap down on big volume. This breakdown signals a continuation of the prior decline (Sep-Oct). In addition, the gap looks like a big breakaway gap that should be considered bearish until proven otherwise. Chart 4 shows weekly prices extending back to 2 and a half years. WMT broke resistance around 50 in early 2008 and broken resistance then turned into support. The first support zone is around 49-50, while the second support zone resides in the low 40s. Given the ferocity of the breakdown, the odds favor a move towards the second support zone over the next few months.

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A GIANT WITH LONG TENTACLES... With a market capitalization in excess of $200 billion, WMT is a true giant that features in a number of key indices and ETFs. These include the Dow Industrials, the S&P 100, the S&P 500, the Retail HOLDRS (RTH) and the Consumer Staples SPDR (XLP). According to the HOLDRS website, Wal-Mart accounts for 24.6% of the Retail HOLDRS. According to the SPDR website, the company accounts for 12.67% of the Consumer Staples SPDR. Chart 5 shows the Retail HOLDRS (RTH) failing at resistance for the fourth time in four months. RTH surged to resistance in early January, but fell back with a gap down today. The gap is negative as long as it holds. A filling of the gap would be quite positive, while a break above resistance at 80 would be bullish.

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Chart 6 shows the Consumer Staples SPDR (XLP) in a trading range since late November. The ETF failed at its December high with an outside reversal on Tuesday and declined further on Wednesday and Thursday. A move above the Dec-Jan highs is needed to break consolidation resistance.

RETAILERS MIXED OVERALL... Despite the warning from Wal-Mart, there were pockets of strength in the retail group. The Retail SPDR (XRT), which is a broad based ETF, actually ended the day with a small gain. XRT consist of some 50 stocks and Wal-Mart weighs in at a mere 2.53%. Chart 7 paints a different technical picture for XRT as well. The ETF bottomed in late November and worked its way higher the last seven weeks. A rising wedge is taking shape with key support at the late-December lows. Even though a rising wedge is potentially bearish, the wedge is currently rising. In fact, XRT is holding up pretty good considering the news from Wal-Mart.

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The next four charts show some retailers that showed strength today. Chart 7 shows Gamestop (GME) surging above its 50-day moving average with strong volume. Chart 8 shows Target (TGT) edging higher with above average volume. The stock has plenty of resistance around 40 and a break would target further strength towards the falling 200-day moving average. Chart 9 shows Sears Holding (SHLD) surging above its 50-day moving average with big volume. Chart 10 shows Family Dollar (FDO) surging higher on Wednesday with big volume and continuing higher today with above average volume.

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BONDS FIRM HEAD OF EMPLOYMENT REPORT... After a sharp four-day decline, the iShares 20+Yr T-Bond ETF (TLT) found support near the prior consolidation and firmed for the last three days. Chart 10 shows TLT forming three indecisive candlesticks as the bond market ponders its next move. The big trend for bonds is clearly up after the huge Nov-Dec advance. This increases the odds of a successful support test. The long-term uptrend provides a strong tailwind for the bulls. The bottom window shows a 14-period RSI. TLT became overbought for a month as RSI held above 70 for most of December. This provides a good lesson for strong uptrends. Securities can become overbought and remain overbought. TLT eventually yielded these overbought conditions with a sharp decline back to the 110-112 area. Support here stems from the early-December pennant. RSI is also in a support zone just below 50. A move back above 50 would be bullish for RSI. Bonds will wait with bated breadth on the employment report tomorrow morning. Bonds usually advance in the face of economic weakness and a worse-than-expected report tomorrow could lift TLT.

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