CONSUMER DISCRETIONARY SPDR HITS A NEW HIGH -- HOME IMPROVEMENT AND APPAREL RETAILERS PUSH MARKET VECTORS RETAIL ETF TO A NEW HIGH -- BIG JUMP IN HOUSING STARTS LIFTS HOMEBUILDERS

CONSUMER DISCRETIONARY SPDR HITS NEW HIGH... A positive sign for the stock market and the economy is the ability of the Consumer Discretionary SPDR (XLY) to hit a new high this week, as shown in Chart 1. The relative strength line (above chart) had fallen during the first half of the year, which was a sign of weak consumer spending. The upturn in the RS line during August to a new four-month high is a positive sign for it and the rest of the market.

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Chart 1

MARKET VECTORS RETAIL ETF HITS NEW HIGH ... One of the strongest parts of the Consumer Disretionary SPDR is the retail industry which is also showing a lot more strength. Chart 2 shows the Market Vectors Retail ETF (RTH) breaking out of a large symmetrical triangle to hit a new high. Its relative strength line (above chart) is just starting to turn up after falling through the first seven months of the year. Home improvement stocks are the biggest gainers in the RTH. Charts 3 and 4 show Home Depot (HD) and Lowes (LOW) surging to new highs. Apparel retailers are also having a strong week. Charts 5 and 6 show strong upturns in Kohls (KSS) and Urban Outfitters (URBN). Their relative strength lines have started rising as well.

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Chart 2

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Chart 3

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Chart 4

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Chart 5

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Chart 6

HOMEBUILDERS ARE ALSO BOUNCING... Another postive sign is coming from a rebound in homebuilding stocks which have been one of the market's weakest groups this year. Yesterday's report of a huge jump in housing starts (and permits) caused heavy buying in that group. The black bars in Chart 7 show the Dow Jones Home Construction iShares (ITB) gapping higher. The gray area is a relative strength ratio of the ITB divided by the SPX. It has also jumped this month for the first time in five months. The brown bars on top of Chart 7 show the price of lumber reaching a five-month high after falling throughout most of the year. Since lumber is the main material used in building a house, a stronger lumber market usually hints at a stronger housing market.

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Chart 7

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Chart 8

LUMBER IS CLOSELY TIED TO HOMEBUILDING STRENGTH ... Chart 8 takes a longer look at the relationship between lumber and homebuilders. After rising during 2012, lumber peaked at the start of 2013 and has traded sideways since then in a bullish "symmetrical triangle" (see brown converging lines). Lumber looks poised to resume its uptrend. The black bars in Chart 8 show Home Construction iShares (ITB) trading sideways along with lumber over the last year. The ITB:SPX ratio (gray area) peaked with lumber at the start of 2013 and has since trended lower. An upside breakout in lumber could be a sign that homebuilders are ready to start playing catch up to the rest of the market. [It's unusual for housing starts to jump so much during the summer. Housing starts usually pick up in the spring after slowing during the winter. Analysts suspect that the unusually cold winter delayed spring starts and pushed them into the summer. Better late than never.]