Although there are a handful of winners in the retail sector (like any sector), it's clear that this industry in general is facing a growing degree of hardship. Were we at the bottom of an economic cycle when consumer spending was tight, it would almost be understandable - and forgivable. But consumption hasn't really slowed, even though the economy has. Yet, the stocks of the major retailing firms are painting a fairly grim picture.

We'll be plotting a chart of the AMEX Retail HOLDRs Index (IRH), since it's a pretty broad representation of the industry. We want to be sure to include both of the key segments of the retail world, which are the mass discounters (e.g. Wal-Mart) and the fashion retailers (e.g. Abercrombie, Federated). The AMEX Retail Index has everything from Amazon to Walgreen's, in the appropriate market share proportions, so it's an excellent proxy for retail in general.

To get a feel for just what kind of breakdown we've seen over this year, we've backed out to a weekly chart. The green line is the 200 day line, which was left behind four weeks ago in a decisively bearish fashion. But, knowing that this industry can be fickle, we were willing to allow for a little volatility. To spot a 'normal' range for the index, we plotted two distinct support levels (red, dashed) that had been verified more than a few times since the beginning of 2003. As of two weeks ago, both of those support lines have been broken, leaving no real floor in sight.

Fundamentally, these companies really aren't doing all that poorly. Revenues are growing at 10.5%, while earnings are growing at 15.1%.....certainly respectable. The problem is that those numbers just aren't good enough when investors see more growth in other places, and there's the threat that this numbers could shrink in 2005. Throw in the fact that the average P/E here is 28.8 (a bit pricy for a retailer), and retail stocks are just a good-old-fashioned liability. 

We're setting a target for the AMEX Retail Index at 75.30. That's about where the lower support line starts (from May of 2003), and represents about a 15% tumble. However, we're also setting a time stop on this bearish bias of no more than four months. Around August, the retailers usually find a bottom and turn around, as investors speculate on back-to-school and holiday sales in the latter half of the year. So, if we haven't hit that big target by then, we'll be switching our stance anyway. In the meantime, our stop on this bearish opinion comes with any close above 91.50.

Price Headley is the founder and chief analyst of BigTrends.com.