CONSUMER DISCRETIONARY STOCKS SHOW LEADERSHIP --HOME DEPOT AND RETAILERS HAVE STRONG DAY -- HOMEBUILDERS SHOW FIRST OF STABILIZATION IN NEARLY FOUR YEARS -- SEMIS AND OIL SERVICE STOCKS ALSO LEAD RALLY -- S&P 500 NEARS TEST OF 800 BARRIER

ANOTHER GLIMMER OF HOPE... Over the last week, we've been writing about a stronger tone in financial stocks and the positive impact that's having on the rest of the market. Today, we're seeing another glimmer of hope in a rebounding consumer discretionary sector which is being fueled mainly by retailers and homebuilders. Chart 1 shows the Consumer Discretionary Sector (SPDR) bouncing off its November low near 16 (while the S&P 500 undercut that low). That relative strength by the XLY is seen more clearly in the rising XLY/SPX ratio since November. The XLY is still below its 50-day moving average. But any sign of strength by this economically-sensitive group is a hopeful sign.

Chart 1

RETAILERS ALSO SHOW RELATIVE STRENGTH... One of the groups helping to drive the XLY higher is retail. Chart 2 shows the S&P Retail Index (RLX) trading over its 50-day average today. Its March low is well above its November low. That superior relative strength is shown more dramatically by the rising RLX/SPX ratio (below chart) which is trading at a new yearly high. Anytime we see retail stocks doing better than the S&P 500 is a time for a bit more optimism. One of the biggest contributors to that stronger performance is Home Depot.

Chart 2

HOME DEPOT CLEARS 21 BARRIER... Home Depot is one of the biggest stocks in the retail group. As such, it carries a lot of influence. Chart 3 shows why that's a good thing at the moment. The daily bars show HD having bounced off previous support around 17 three times since October. In today's trading, it's trading over 21 for the first time in more than a month (and is testing its 50-day line). Of course, the stock still needs to overcome more substantial resistance barriers between 23 and 25. But it's stronger relative performance (see ratio below chart) is an encouraging sign. Home Depot may be getting a lift from today's report that housing starts and permits jumped in February. That's also boosting homebuilders.

Chart 3

LENNAR LEADS HOMEBUILDING BOUNCE ... A number of homebuilding stocks are showing decent percentage gains. Chart 4 shows Lennar having already cleared its 50-day average. Its relative strength ratio (below chart) has been rising since November. It was the bust in housing that started the global meltdown. So any hint of better performance in the group is encouraging-- even relatively speaking. Chart 5 shows the PHLX Housing Index bouncing off its November low with a rising relative strength line (solid line). Chart 6 shows why that may be important. It plots a falling HGX/SPX ratio since mid-2005 when homebuilding stocks started to peak. This last bounce in the housing ratio is the first hint at a bottom in nearly four years (see up arrow). A break of that falling trendline would be an even more welcome sign.

Chart 4

Chart 5

Chart 6

TWO MORE GROUP LEADERS ... It's usually a good sign for the market when semiconductor stocks are showing leadership. And they certainly appear to be. Chart 7 shows Semiconductor Holders trading well above their 50-day line and nearing the top of a four-month trading range. Their relative strength ratio is rising as well. Another group starting to show a little bounce is energy. Chart 8 shows the Oil Service Holders clearing their 50-day average today. That came on the back of another gain in crude oil. One of the side-effects of a rising stock market has been a weaker dollar. Both of those factors are putting a bid under oil and most other commodities (except for gold). Gold remains in a corrective phase.

Chart 7

Chart 8

S&P 500 NEARS TEST OF 800... My last headline on Friday was that the market might need one more dip to complete a bottom. I wrote, however, that the key would be the ability of the S&P 500 to clear the 800 barrier. Here are some reasons why that's so important. In chartwork, a previous low is a resistance barrier. The daily bars in Chart 9 shows the S&P 500 bottoming just above 800 (804 to be exact) in mid-January. That's also where the 50-day average comes into play (see arrow). The hourly bars in Chart 10 show two other reasons why 800 is so important. A two-month down trendline is located there, and it's a 50% retracement of the January/March decline. A close above 800 would signal that a bottom is in place. Whether we get another pullback or not, it's not to soon to start thinking a bit more positively. I think that's the message being given by recent buying in financials, retailers, and homebuilders. It looks like an intermediate bottom is being formed which could reach the January high.

Chart 9

Chart 10