by Daniel Putnam | August 27, 2013 7:16 am
The outlook for the retail sector has been the subject of much debate in recent weeks. While retail stocks have delivered outstanding performance in the past three years, enough retailers have reported punk second-quarter earnings that the durability of the rally is being called into question.
The concerns have been exacerbated by rising mortgage rates, which have caused the previous flood of refinancings to slow to a trickle — resulting in a sharp reduction in the incremental dollars available for consumers to put to work in the nation’s stores.
With the headwinds to consumer spending possibly becoming stronger, investors need to question whether it’s smarter to lock in gains now or let the winners ride.
As is often the case, the charts provide a clue. From a broad standpoint, the outlook for the sector remains positive and discount retailers, in particular, look like a source of opportunity. At the same time, however, some key stocks are signaling that a measure of caution is in order.
First, the view from 50,000 feet: The broad retail sector, as measured by the Retail SPDR (XRT), has slid below its 50-day moving average and is sitting right at its one-year trendline.
While this bears watching, zooming the chart out to a five-year view shows that the sector can sustain some near-term damage and still maintain its longer-term uptrend:
This is certainly good news for the bulls, but the charts are also flashing warning signs for a number of individual stocks. Last week, we noted in “3 Blue Chips Whose Charts are Screaming Sell!” that Walmart (WMT) was close to breaking below its 200-day moving average as well as its two-year trendline. That scenario has in fact unfolded in recent days, putting WMT’s chart in an unfavorable technical position.
Unfortunately, Walmart isn’t the only big retail stock in this situation. Target (TGT) also has violated both its lower support line and 200-day MA, which argues for caution in the stock even though it isn’t particularly expensive here. Macy’s (M) (not shown) remains above both lines for now, but another 4% downside will put it in a similar position as Walmart and Target.
Dillard’s (DDS) and Dick’s Sporting Goods (DKS) are in perilous territory, too. Like the names mentioned previously, both have fallen below important trendlines and their 200-day MAs. Given the inability of big players such as Walmart and Target to hold their support levels, the prudent investor should consider taking profits or buying protection in two mid-tier players that might be in jeopardy of a further breakdown.
While not a pure retailer, eBay (EBAY) — whose fortunes are driven largely by consumer spending — is showing signs of cracking, with a chart pattern similar to those of DDS and DKS. A drop below $50 signals trouble for the stock:
Although a number of retail stocks are having trouble right now, certain discount retailers appear to be on the verge of breaking out. Dollar General (DG), Ross Stores (ROST) and Family Dollar (FDO) are all sitting just short of 52-week highs. This might not necessarily be the best sign for the broader group — since it indicates strength in stocks that would benefit from investors’ “trading down” to less-expensive options — but these names look to be in a position to benefit if consumer spending does indeed weaken from here.
Consumer spending trends and the performance of retail stocks have confounded skeptics for years, so the burden of proof is on the bears. But for now, the charts are showing some divergences in a sector that has been uniformly strong for some time. Be sure to watch these charts carefully if you’re thinking of committing new capital to the retail sector.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.
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