[Excerpted from Bill Cara's Week-in-Review]

Anybody can tell you that the equity market is a disaster and that stocks have fallen x percent over y weeks. They can even tell you the sectors and industry groups that have led the market down. Your question should be, “Tell me something I don’t know.”

What you are seeking is value-add. If so, you have come to the right place because I try very hard not to waste people’s time restating the known, trying to keep my name in lights as others do. I don’t take kindly to wearing a clown suit.

I am a trader, and there are only two factors in the study of market prices that interest me: (i) how do I manage risk so that the wealth I have stays mine, and (ii) how do I build wealth quickly because if I’m building it, I’m not losing it.

Rather than calling me a person with insights into the workings of markets, let’s just say that I am an observer. I take notes. Most of them I share with you. Some of them mean something to you, and some are more meaningful to the next person. It’s a big world.

I believe the key to the global equity market lies in the trend and cycle analysis of the U.S. retailer industry group. The linkage is to the damage and eventual recovery of the credit market system. If you recall, it was back in June 2007 when I reported that the U.S. retailer stocks had hit the wall, and the problem then, as we only later saw, was not spending, but credit tightening.

So, today I will be spending more time looking into this industry. My notes will be found in the Consumer Discretionary sector.

Before I get started, however, let me quickly review for those who joined the blog recently, how the equity market is structured into segments, sectors, industries, and industry groups, which is called the Global Industry Classification System (GICS). There are a couple other classification systems, like the one from Dow Jones for instance (which Yahoo! Finance uses), but the GICS is the one most frequently used by professional traders.

Using GICS, I can show you how I work myself down to the US Retailers ($RLX) index and to individual companies in it and then to peer companies.

Why I do the latter is to look for the highest quality among peers, which I assess (subjectively as well as objectively) from factors such as business model, management, balance sheet strength, safety and growth of dividends, cash flow and earnings growth, operating margins, and returns on shareholder equity, mostly. If the data is organized for you, spotting the differences and deciding on quality is fairly quick and easy.

Since you are not buying the company (i.e., investing), and you are only trading its shares, which may be for days, weeks or months depending on your approach to portfolio management and the market environment, you don’t need to have a business valuator’s expert working knowledge of the company. Besides there is so little to choose between many companies, the choice often comes down to beauty in the eyes of the beholder or personal knowledge or involvement (e.g., the company is your employer, or in your hometown, etc).

To make this easy, I am going to put the market into the context of the local food supermarket, where presumably you’ve been a few times and recognize the signs over aisles and shelves, etc. Without this organization, you’d be lost; same thing in the equity market.

A supermarket is divided into areas or segments: dairy, meat, packaged goods. The equity market is divided into interest-sensitive, consumer, and industrial/commodity-related segments. You expect to find the Retailers in the consumer segment, which is broken into staples, discretionary and healthcare.

When you go looking for a Retailer, it might be in the aisles for staples (Wal-Mart, for example), or discretionary (General Motors, for example – no wisecracks please), or healthcare (Walgreens, for example).

So once we get into the consumer segment, we look for more specific signs.

2510 Automobile & Components
2520 Consumer Durables & Apparel
2530 Hotels, Restaurants & Leisure
2540 Media
2550 Retailing

Not being overly organized, since the market is rather unlike the army stores, the retailing is put into the 25 section, which is the discretionary spending, and the 30 section, which is the staples, including some health-related, rather than healthcare goods and services (35). But you get the point, and you move down to those sections.

It’s a big supermarket, so you look at the smaller signs to get you closer to what you need.

251010 Auto Components
251020 Automobiles
252010 Household Durables
252020 Leisure Equipment & Products
252030 Textiles, Apparel & Luxury Goods
253010 Hotels, Restaurants & Leisure
254010 Media
255010 Distributors
255020 Internet & Catalog Retail
255030 Multi-line Retail
255040 Specialty Retail

Now you see so many aisles, each one long and with two sides, and shelves up and down, so you look at the even smaller signs to guide you.

25101010 Auto Parts & Equipment
25101020 Tires & Rubber
25102010 Automobile Manufacturers
25102020 Motorcycle Manufacturers
25201010 Consumer Electronics
25201020 Home Furnishings
25201030 Homebuilding
25201040 Household Appliances
25201050 Housewares & Specialties
25202010 Leisure Products
25202020 Photographic Products
25203010 Apparel, Accessories & Luxury Goods
25203020 Footwear
25203030 Textiles
25301010 Casinos & Gaming
25301020 Hotels, Resorts & Cruise Lines
25301030 Leisure Facilities
25301040 Restaurants
25401010 Advertising
25401020 Broadcasting & Cable TV
25401030 Movies & Entertainment
25401040 Publishing
25501010 Distributors
25502010 Catalog Retail
25502020 Internet Retail
25503010 Department Stores
25503020 General Merchandise Stores
25504010 Apparel Retail
25504020 Computer & Electronics Retail
25504030 Home Improvement Retail
25504040 Specialty Stores

Now, if you are a boater, you’ll say this is a pretty good navigational system. But nothing’s perfect, so you’ll find the Food and Drug Retailers in the 30 section, and you may wonder why the Drug (Pharma) Retailers are in the Staples section until you realize that in those stores the dispensary is just a small part of the store, and the rest are many staples, even if they are health related.

30101010 Drug Retail
30101020 Food Distributors
30101030 Food Retail
30101040 Hypermarkets & Super Centers
30201010 Brewers
30201020 Distillers & Vintners
30201030 Soft Drinks
30202010 Agricultural Products
30202030 Packaged Foods & Meats
30203010 Tobacco
30301010 Household Products
30302010 Personal Products

Today, I think the Retailers are the key to the market, which is to say the U.S. consumer either has money to spend or not. If they have it, of course, they’ll spend it. Then the broad economy will pick up and the recession will be left behind.

I’ll look at the 56 retailers that dominate the U.S. scene, studying the heaviest capitalized 30. Here is the list of the 30, which you can cut and paste into the charting system at billcara2.com:

Walmart (WMT), CVS, Home Depot (HD), Lowe's (LOW), Target (TGT), Walgreen (WAG), Costco (COST), Kroger (KR), Amazon (AMZN), EBAY, Best Buy (BBY), Safeway (SWY), TJX, Kohl's (KSS),  Gap (GPS), Starbucks (SBUX), Bed, Bath & Beyond (BBBY), Sears (SHLD), JC Penney (JCP),  Family Dollar (FDO), Dollar Tree (DLTR) Ross (ROST), Macy's (M),  Limited Brands (LTD), Urban Outfitters (URBN), Nordstrom (JWN), Tiffany (TIF), BJ's (BJ), Abercrombie & Fitch (ANF), Whole Foods (WFMI)

I don’t have the time to look at and publish this data, but every stock has an eight-digit GICS code. Bed, Bath & Beyond, for example is 25504040 (Specialty Stores). Black & Decker (BDK) is 25201040 (Household Appliances).

If you want to look at the Black & Decker peers, you look for the companies/stocks coded 25201040. You will also find Stanley Works (SWK), Whirlpool (WHR) and Makita Corp (MKTAY). Then if you go to Yahoo Finance or Google Finance and look for direct competitors, you will see that Japan’s Makita is closest. At Google Finance for BDK you can tick the chart comparison to MKTAY (or vice versa) and see the price tracks overlaid.

You can then see how these price series data move up and down together. If you consider that consumers are out buying the same products at the same time, and other operating factors, like business conditions, etc, are quite similar, you’ll understand why. Then if you have ever been a money manager in one of the bigger firms, like I have with Dominion Securities Investment Management, you will know that every week there are visits by the institutional sales people who have theme stories to peddle. They work with the research analysts and derive these stories and peddle them to people on the buy side. That generates commissions which is how the sell-side works. So, the buy side plays follow the leader and prices follow – up and later down. It’s up to you and me – not being in the “investment” meeting room with the sell-side and buy-side – to figure out later what stories were sold and bought, and to try to even beat these people to the punch.

But, going back to the price charts, in some computer services you can overlay the trend and cycle smoothed data for several stocks, like RSI-7 for example.

Next I am about to tell you the most important thing I have ever written. I learned this use of the Trend & Cycle System and its application to the GICS system from my associate and mentor, the late Ian Notley. Dominion Securities hired me to work with Notley and subsequently changed their mind during the Bear market of 1981, where the costs of moving me to NY City would have been prohibitive during the time of cutbacks. So, rather than lose me (because they knew I would quit as they had reneged), they put me into Investment Management and gave me access to my own Notley Machine. When the staff departed the office after the close Friday at 4pm, I stayed. I would get so overwhelmed at the knowledge I was getting from the overlays of just the trend/cycle smoothing data – I had no time for price or volume or interest in cluttering the computer screen – that I could not leave it. I would not sleep. On weekends, I would work through the night, and Saturday and through the Saturday night non-stop, going home exhausted on Sunday to rest up for Monday morning. But by Monday morning, I could make decisions, with almost 100% confidence, like sell the Household Appliances and buy the NatGas stocks for example. I learned that the market breathed like any human. I saw that the market was just people acting like people, and similar companies fighting the same elements in business to get successful or to stay alive. I pushed myself to incredible levels of intensity in focusing on market prices and their inter-relationships, working probably as hard or harder at this than any virtuoso performer in classical dance or music. I saw the art and the science, and I was truly inspired.

People today ask me how I can have such a feel for the market. Oh, you cannot imagine the sacrifices.

Because money is involved, nothing’s easy. The sell-side noise, the deceitful practices, the too frequent intervention by so-called ‘authorities’, the many silly rules and regulations, the lazy media, the constant competition from truly brilliant, well-funded opponents, and the rest – it all adds up to a minefield. If you do not understand the basic principles of strategy and tactics, of command and control, of navigation, and so forth, and have incredible patience and stamina, you have little hope of winning.

But, you can. That’s why I decided to blog. It was over two years later that I was asked to consider writing a book, which I did. Then another light went on; why not stop the retirement and return to the war theater. The time was right, I felt, because the opaque glass walls around capital markets were shattering for all the reasons I left the industry. The ubiquitous conflict of interest issues are now front and center, and can no longer be ignored. The same ex-editor of Fortune Magazine and fund of funds manager who dueled with my ideas for regulation of hedge funds in a June 2, 2006 feature story of the Wall Street Journal sniffed at the notion I had advanced for a total restructuring of the financial services industry and regulation of capital markets. His nose is stuck in smelly stuff now. Many major banks that I said would be “toast” are now bankrupt. The G-20 this weekend says the system must be rebuilt. Whether or not the new system is built right or not is not my call – I don’t expect the movers and shakers to do anything but to serve their own interests – but I now have the passion to get back into the game as a professional. Thanks to you – well over 100,000 of you – I have no doubts to the ultimate success of my venture. I couldn’t have picked a better time or circumstance to start.

In wrapping up the opening here, I will say that trading is different than writing about trading. I will have to take precautions to check myself from discussing with the general public serious matters that would possibly impact, positively or negatively, on any single person’s decisions. I am not here to fish for you. All I can do is show you ways to teach yourself. The actual fishing on your part is strictly up to you.

Think about this: when I write something at 9:00am that indicates I am buying, say Goldcorp (GG), at $20, I write with honesty, but it may be that at 10:00am I am selling. It may be that at 9:00am I was writing puts or buying calls or using straddles, strangles or whatever. I may be taking on new clients that are totally loaded in GG, and my traders are paring the positions to create the balanced portfolio that the client’s risk profile called for. The truth is that you cannot take a matter of immeasurable complexity and make it simple. I try, as you know, to make things look simple, but believe me, nothing’s simple when it comes to money and the market.

As I move forward as a professional trader and a free blogger, please appreciate the job I try to do to keep the two roles free of the basic conflicts that I see others get caught up in. In my case, should it happen, I assure you it’s an honest mistake.

Let’s look at the week that has everybody in the world who trades in capital markets in awe. Before we do, however, let’s consider one fact. The U.S. equity market this week was open for trading 32.5 hours. During that time the closely followed DJIA index dropped -5.00%. But, in just one hour – the final hour of the week, the DJIA plunged from 8917 to 8497, which is a loss of -4.71%.

The question is, was the final hour the beginning of Financial Armageddon or not. I’m going to say, no, the extreme movement of prices up and down as traders panicked out, and then in and then out of the U.S. equity market on Wednesday through Friday was caused by people being out of control. It was analogous to the terrible California fires this week, a matter of which direction the wind was blowing as to which communities would be torched.

If you are a long-term trader, who fancies yourself as an investor, you are probably demoralized by the constant volatility. If you are a professional trader who can make decisions minute to minute, with excellent information and tools at hand, then you are a most happy camper.