By Ann Sosnowski

Retail is being smacked down before the holiday season.

Gap Inc. (GPS:NYSE) reported that its third-quarter revenue fell 11% due to lowered sales both at its flagship stores and Old Navy. Same-store sales at Old Navy were down 7% from a year ago. Additionally, the company issued a warning that it was cutting its forecast for full-year operating margins.

Ann Taylor Stores (ANN:NYSE) turned in better-than-expected third-quarter earnings at a 29% increase. But it warned that fourth-quarter sales would most likely run flat.

Big Lots (BIG:NYSE) came out on top, so to speak, stating that its third quarter tacked on 7 cents per share, compared to a loss of 17 cents per share a year before.

With all of this mixed news (good earnings versus poor future guidance), the Retail Service HOLDRs (RTH:AMEX) is attempting to break past $100, but is having a hard time doing so.

A quick look at the RTH's daily cyclical movement from November to at least February every year shows apparent weakness.

Last year around this time, the RTH was valued at a high near $100 as well. Going into Thanksgiving, and continuing into February 2006, the RTH posted a low of $93.06 after a cyclical falling trend leg.

That marked a drop of 6.9% on the retail index in only three months.

In November 2004, the RTH marked a high of $102.15… and fell to a low of $87 by April 2005, translating into a loss of 14.8% in five months.

In November 2003, the RTH only managed to move as high as $94.69, before taking a quick swoop down to $85.62 by mid-December 2003. Albeit, the RTH managed to gain more strength and move back to that November 2003 high by March 2004… but not before correcting 9.58%.

From now, until the end of 2006, is the worst time to hold retail stocks… or an upside position on the RTH or any retail index.

The RTH is just as cyclical as any other index. The good time to buy would be a low in August, as all stocks are pumped up in anticipation of third-quarter earnings.

Not until retail can prove its strength through the holidays and the first two fiscal quarters of the annual year does retail really look like a good buy.

Unless you have your eye on a specific company that supplies niche customer products.

As I've stated all week, it would behoove you to cut down on your exposure to this industry going into 2007. The RTH has hit these highs near $100 before… and will most likely decline to a falling support point between $93 and $95.