RETAIL SALES GROWTH BREAKS THE 1% THRESHOLD -- CONSUMER DISCRETIONARY SECTOR SHOWS RELATIVE STRENGTH IN MARCH -- HOME CONSTRUCTION ISHARES FORMS BULLISH CONTINUATION PATTERN -- RETAIL SPDR AND MV RETAIL ETF LEAD MARCH SURGE
RETAIL SALES GROWTH BREAKS THE 1% THRESHOLD... Link for todays video. The Commerce Department reported a 1.1% rise in February retail sales and the January number was revised higher. This better-than-expected number put retail sales growth above 1% for the first time since September. Chart 1 shows an area chart for monthly retail sales growth. As with the employment report, the cup is half full as long as retail sales growth is positive. We have yet to see sharp positive spikes like in 2004 and 2005, but retail sales are still growing overall. The trouble starts if/when we start seeing negative numbers, like in April, May and June 2012. Note that the image below is static and the data is private. I created a user-defined index using a Pro membership at StockCharts.com
Chart 1
CONSUMER DISCRETIONARY SECTOR SHOWS RELATIVE STRENGTH IN MARCH... PerfChart 2 shows that the Consumer Discretionary SPDR (XLY) has been one of the top performing sectors since late February. In fact, it is the second best performing sector over the last 12 days. All sectors, and the S&P 500, are up since late February. The Consumer Discretionary SPDR (XLY), Materials SPDR (XLB), Healthcare SPDR (XLV) and Finance SPDR (XLF) are leading as their gains outpace the gains in the S&P 500. It is a strange foursome. XLB is making up for relative weakness in February. XLV held up great in February and surged to new highs in early March. XLF and XLY are the strongest of the four offensive sectors. Overall, it is positive to see relative strength coming from the most economically sensitive sector (consumer discretionary).
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Chart 2
HOME CONSTRUCTION ISHARES FORMS BULLISH CONTINUATION PATTERN... Businesses dont get much more cyclical than homebuilding and retailing. These are the ones to watch for clues on the US economy and the consumer, which is the single most important economic barometer. Chart 3 shows the Home Construction iShares (ITB) hitting resistance near the January-February highs with a consolidation the last five days. Last weeks gap is holding to keep the short-term trend bullish. A break above resistance would signal a continuation higher and target a move to the 26 area. If we view this surge-consolidation sequence as a bull flag that flies at half-mast, then a breakout would signal a move comparable to the surge from late February. The indicator window shows the price relative (ITB:SPY ratio) zigzagging lower the last two months. There is some concern because ITB is showing relative weakness since late January, but the short-term uptrend would not reverse unless ITB fills last weeks gap. Support, therefore, it marked at 23.
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Chart 3
RETAIL SPDR AND MV RETAIL ETF LEAD MARCH SURGE... The Market Vectors Retail ETF (RTH) and the Retail SPDR (XRT) are two of the strongest industry group ETFs since late February. Both are up over 5% from their late February lows. If you think that is impressive, note that the Home Construction iShares and the Airline ETF (FAA) are up over 9% in 13 days. Chart 4 shows RTH breaking wedge resistance at the beginning of the month and surging to a new 52-week high. The ETF is overbought, but showing no signs of weakness. Broken resistance in the 46.5-47 area turns into first support. The indicator window shows Martin Prings Know Sure Thing (KST) oscillator. This momentum oscillator smooths four different rate-of-change numbers. See our ChartSchool article for details. In any case, I simply look to see if KST is positive or negative. The path of least resistance is up when positive and down when negative. KST has been positive since the last day of November. Chart 5 shows XRT hitting a new 52-week high today. Broken resistance marks first support in the 68.5-69 area. The Raff Regression Channel and February lows mark medium-term support in the 65.5-66 area.
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Chart 4
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Chart 5
QQQ AND XLK MAY BE LAGGING, BUT THEIR CUPS REMAIN HALF FULL... The Nasdaq 100 ETF (QQQ) and the Technology SPDR (XLK) have been underperforming the broader market, but both remain in uptrends since mid November and are holding their March gaps. Relative weakness stems from Apple, which is the biggest component for both ETFs. Microsoft, which accounts for over 7% of each ETF, has also been underperforming the broader market for several months. Chart 6 shows XLK breaking above resistance at 30 with a gap-surge last week. This breakout and gap-surge are holding. Broken resistance and the gap mark the first support zone to watch. A move below 29.75 would fill the gap and negate the breakout. RSI confirms that the cup is half full. Notice that this momentum oscillator held the 40-50 zone in December and again in February. Momentum favors the bulls as long as RSI holds above 40. I suspect that RSI would break 40 if/when XLK breaks the December trend line. Chart 7 shows QQQ with similar characteristics.
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Chart 6
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Chart 7
BEARISH DIVERGENCE FORMS IN BREADTH INDICATOR FOR S&P 500... Last week I reported that the AD Lines and AD Volume Lines moved to new highs and confirmed recent highs in the major stock indices. Even though these indicators are clearly in bull mode, another breadth indicator is not keeping pace. I would not call this a major bearish warning just yet, but we should watch this indicator for a possible signal that could foreshadow a correction. Chart 8 shows the S&P 500 %Above 50-day SMA ($SPXA50R). This breadth indicator measures the degree of participation using the 50-day moving average as its yardstick. Over 90% of S&P 500 stocks were above their 50-day moving averages in January. This number plunged to 60% in late February and then surged back to 85% this week. 85% is still a significant number and bullish overall, but fewer stocks are above their 50-day lines in March than in January. With the S&P 500 trading at a new high, this means a bearish divergence is taking shape. Notice that divergences and subsequent support breaks foreshadowed the last two corrections (April-May and October-November). The late February low marks support for this indicator now. A break below this level would confirm the divergence and put the corrective wheels in motion.
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Chart 8
FEWER NASDAQ 100 STOCKS PARTICIPATING IN THE MARCH SURGE... Chart 9 shows the Nasdaq 100 %Above 50-day SMA ($NDXA50R) with similar characteristics. Notice that the bearish divergences in 2012 were more pronounced and the subsequent support breaks signaled the start of corrections. Another sizable divergence is taking shape with the late February low marking support.
