Market Thoughts On January 15, 2013

Just because S&P 500 ended the day flat does not mean nothing is happening. Two very important developments are worth discussing.

Dow Jones Transportation Average (DJT) closed at an all-time high today. Dow Theorists are jubilant and preparing for an enormous rally still to come, and probably rightly so. I am a big believer in the theory and have a chart (below) to share with you. When Transports confirm, and especially lead, it is almost always a strong bullish signal for Dow Jones Industrial Average. This said, a pullback is not out of the question, and I would not be surprised to see one right here, as it is never a straight move in one direction - DJT is up 800 points in just 60 calendar days. But be very cautious and nimble on the short side - it will be just a pullback in a bull market which will still go to new all-time highs.

click on chart to enlarge

Another major development today was the retail sector. I discussed in my earlier post on December 29th (read here) why so many players, who got spooked by obscure MasterCard study right after Christmas, overreacted and sold at the bottom of the pullback in XRT. December retail sales, reported today, exceeded expectations and proved that American consumers still found the way to continue spending like drunken sailors. I am also questioning all the post fiscal cliff worries about slower retail sales going forward based on the payroll tax increase (or more correctly a return to normal), which will mean less take-home pay for consumers to spend. They will find the way to absorb the average paycheck cut of $20 a week with no negative effect on their spending, I bet.
So XRT went up 2% today. I think the reason for the strong move could be the fact that no major discounting was done by retailers this holiday season due to well-controlled inventory, and since the top line looks like it came in just fine (based on today's report), 4Q2012 bottom line may look much better than feared.
Below is the chart of XRT over SPY. Look at how important the retail sector has been in this bull market. Six times a diverging higher low in XRT has helped to mark a bottom on SPY pullbacks.

click on chart  to enlarge