The Insightful Trader

Retailers Upgraded – Are They Really a Buy?

by on Nov.10, 2009, under Market Commentary

The past ten days have seen a spate of upgrades in the retail sector by some of the biggest firms on the street. First there was Citicorp’s upgrade of Target two weeks ago and of course, not to be outdone, Barclays, J.P.Morgan  and Credit Suisse all jumped on the wagon with their favorites, including M and ANF. Retailers did report some surprising increases in sales last week on a year over year basis,albeit still down, just better than expected and which many attributed to a brief cold snap in parts of the country. Is this a classic example of the institutions calling the top in the market?

My first question is ‘What are they going to sell?’ Most have come out and said they’re ordering substantially less for the holiday season. West Coast ports are reporting significantly less traffic and incoming freight. Stansberry Research’s Tom Dyson, who likes to follow rail traffic as an economic indicator and has even been known to hop a ride occasionally, reports that it’s anemic and that boxcars are stacked up everywhere. They sure are not trucking in much merchandise, based earnings reports and the outlooks from truckers in the past weeks, which were pathetic.  Perhaps the retailers have come up with just in time manufacturing, set up in the empty space seen in many malls these days, with much more to come probably after the first of the year I’m afraid.

My second queston is ‘Who’s buying?’. Obviously, there are plenty of people that still have money, but with frugality being the new watchword are even they going to be spending as in the past? And what about our 10.2% official unemployment rate which many experts claim is closer to 17%, and the expectations are for it to continue to rise for the foreseeable future. Most of those aren’t going to be doing any lavish spending. To top it off, I thought it was ironic that Citicorp upgrades Target only a couple of weeks after they created a national uproar by raising their credit card rates 8-9% to almost 30% across the board just in time for the Christmas season. Glad to see that they’re passing on our taxpayer money to help the economy and the consumer. With the very real possibility of a double dip recession come next Spring, I just don’t see being a buyer of retail stocks at these levels.

So we’ve looked at a few of the fundamentals, let’s take a look at the price action. First the RLX, the S&P Retail Index, has basically doubled this year, more than three times the percentage gain seen in the Dow Jones.

As you can see in the 20 month chart below, we’ve retraced nearly 100% in the past year and although in an up trend still, we face major resistance within the near price frame at about the 415-425 range, both from a strong horizontal line as well as the 200ma on the 5yr weekly(not shown). Notice the negative divergence on the MACD.

RLX 11709

Now looking at a 5yr chart of TGT below, whom I feel is one of the better positioned retailers out there, if there is one, you can see that the price has doubled since the first of the year, and we are real close to the 62% fibonnaci which comes in at approximately 52. We also have  the critical 200ma on the weekly chart, in addition to a ton of horizontal resistance going back 5 years. As you can see on the one year chart below this one, that we’ve got a well defined wedge setting up.

TGT 5yr 11709

TGT 1yr 11909

So my question is, despite the pronouncements of numerous institutional analysts, is now the right time to be moving into retail stocks. Based on the fundamentals of our economy that I see and the technical picture, I think I’ll have to pass. What do you think? Please comment below.

Speaking of retail stocks, we’re constantly bombarded that everyone needs some Walmart in their portfolio by the talking heads on TV. Now we’ll all admit at WMT is an excellently run company and is one of the pre-eminent retailers in the world as well as paying a 2% dividend. However, take a look at the 10 year chart. Making money on WMT would have been a challenge for even the most nimble of traders and if you were a buy and hold investor you’ve gone nowhere for TEN years.

WMT 10yr 11909

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