APPLE TESTS OLD HIGH -- MARKET IS LOSING HOUSING AND REIT SUPPORT -- CONSUMER DISCRETIONARY/STAPLES RATIO IS STARTING TO WEAKEN WHICH SHOWS MORE CAUTION -- HERSHEY FOODS RISES WHILE SHERWIN WILLIAMS TUMBLES

APPLE GAINS 5% BUT REACHES RESISTANCE... Apple shares have gapped 5% higher today. Upside volume over the last two days has been exceptional. That's given a boost to the technology sector. There is one caveat, however, that you should at least be are of. Apple is testing its all-time high just above 202 which was hit at the end of 2007 (as shown in Chart 2). In chart work, a retest of a major peak is a very important test. Whether or not Apple is able to exceed that previous peak should tell us something about the strength of its uptrend.

Chart 1

Chart 2

PULTE HOMES FALLS 4% ... A disappointing report on housing starts has put homebuilders under more selling pressure today. Chart 3 shows Pulte Homes slipping below its 200-day average for the second time this month. Its relative strength line (below chart) has been falling since late August. The current market advance has continued with little or no help from the housing and real estate groups.

Chart 3

MARKET LOSES HOUSING SUPPORT... We all know that the market's problems that began in 2007 started with housing. So it was big relief to see that group help lead the market higher since March. Since the March 9 bottom, the PHLX Housing Index (blue line) has gained 85% versus 59% for the S&P 500 (black line). The HGX started a downside correction in early May which anticipated a milder pullback in the S&P 500 during June. Both turned up together in early July. The summer pullback, however, came in housing stocks first. Housing stocks are weakening again. Chart 4 shows the S&P 500 hitting a new recovery high during October. Housing stocks, however, have failed to confirm the market high. [The S&P has gained 2% since September 17 while the HGX has dropped 10%]. A similar divergence exists with REITs. Chart 5 shows the Dow REIT Index (DJR) trading well below its September peak and threatening its 50-day average. Its relative strength line (below chart) also started to weaken in mid-September. Those divergences raise the question as to whether or not the market can keep climbing with no help from housing and real estate.

Chart 4

Chart 5

ANOTHER NEGATIVE DIVERGENCE... Here I go again looking for problems where none may exist. It must be something in my technical DNA that makes me look for subtle warning signs beneath the surface of the current market advance. [For the record, however, I view any market pullbacks as part of an ongoing uptrend (or bottoming process) and buying opportunites]. Having said that, here's another short-term warning sign. Over the last few weeks, I've been writing about new signs of buying in defensive stock groups like consumer staples. When defensive stocks start showing better relative strength, that's often (but not always) a warning that investors are starting to hedge their bets a bit. One way I like to measure market sentiment is to plot a ratio of the Consumer Discretionary SPDR (XLY) divided by the Consumer Staples SPDR (XLP). When the XLY is stronger (rising ratio), investors are optimistic. A stronger XLP shows the opposite. Chart 6 shows that the XLY:XLP ratio (black line) tracks the trend of the S&P 500 (green line) pretty closely. In fact, the ratio turned down first during 2007 and bottomed first last December (see trendlines). Chart 7 shows the two lines rallying together since March as consumer discretionary stocks helped lead the market higher. Chart 8, however, shows the XPY:XLP ratio failing to confirm the last S&P move to new high ground. That suggests to me that investors are starting to sell some discretionary stocks (which include homebuilders) and buy defensive stocks like consumer staples. That's a short-term caution sign.

Chart 6

Chart 7

Chart 8

HERSHEY UP, SHERWIN WILLLIAMS DOWN... With the market on the defensive today, consumer staples are the day's top group while consumer discretionary stocks are the weakest. Today's staples leader is Hershey Foods. [Tobacco stocks are also strong]. Chart 9 shows the stock hitting a new monthly high after finding support at its 50-day average. Its relative strength (solid) line is starting to bounce for the first time in awhile. One of the biggest discretionary losers (besides Pulte Homes) is Sherwin Williams. Chart 10 shows that stock tumbling below its 50-day line on rising volume. Its relative strength (solid) line is also falling. Although I remain generally positive on the stock market, I continue to believe that some rotation into more defensive stocks is a prudent move at this time. Not only are they relatively cheaper, but they're safer. Bear in mind that the Dow and S&P 500 are nearing formidable resistance near 10500 and 1120 respectively which are fifty percent retracements of bear market losses. That in itself may be reason enough to turn a bit more defensive.

Chart 9

Chart 10