Strong Year-End Rally on the Back of Retail

Strength in retail stocks suggests strength in the economy and supports our year-rend rally thesis.
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At The FRED Report (

www.theFREDreport.com

), we have been bullish on the markets and the economy for most of the year. One of the main reasons for this stance has been the performance of consumer related sectors -- the XLY (SPDR Select Sector Consumer Discretionary ETF) has been one of our favorite sectors since March 2009, for example. It is hard to see a double-dip recession looming when sectors such as this are market leaders. Transportation stocks have also supported this view.

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In our sector work, we generally follow the ten S&P GICS sectors. As the holiday season approaches,

we have focused our attention to the retailers and they have been showing surprising strength

. Today, we examine the RTH (HOLDRS Retail ETF). A look at the monthly chart of the RTH shows that the rally off of the 2009 lows made a double top vs. the highs of 2007, while the stock market as measured by the SPY (SPDR S&P 500 Trust) remains substantially below the 2007 peak. This outperformance suggests the consumer is alive and well, and that the economic recovery is on track. This, in turn, confirms the message of the XLY.

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There is some disparity in the performance of stock components of the RTH, and this seems to reflect changes in shopping habits over the last few years. The number one performer in the RTH is Amazon.com (AMZN). We have featured this name in our Sector Review (

www.thefredreport.com/categories/Sector_Review

) as a favorite, and it is interesting to compare the performance with Macy's (M). The market is saying that online shopping should win out over bricks and mortar in the years ahead. TJX Companies, Inc. (TJX) is also outperforming, and this is a discounter (think TJ MAXX) relative to M, which we think also reflects a changing consumer.

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Other interesting chart patterns in Retail include Costco (COST), and The Limited (LTD). Costco is known for warehouse pricing, and the quality of its store brands, as well as small business services, such as credit card processing. They have traditionally been an innovator in the warehouse store space (they are starting to offer health insurance in some states, for example).

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To conclude, AMZN is strongly up long-term, but may be overextended. LTD is a strong up pattern as well. A bit more risky are TJX and COST, but the indicators suggest these are all up charts. These four look to be the best names in the RTH for investors.

Strength in the retail stocks suggests strength in the economy and supports our year-rend rally thesis.

We continue to believe that the market could pull back after the mid-term elections, and then a strong year-end rally is in the cards

.

Fred Meissner is founder and publisher of

The Fred Report

. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report. A detailed bio is here:

Fred Meissner

.