Has America’s spending binge finally come to an end?
It just may have, if you believe the message the market is currently sending. Consumer discretionary stocks in general, and retail stocks in particular, have experienced very shaky performance thus far in 2014. The downturn has picked up additional steam this week, as a number of retailers have sunk after reporting disappointing numbers.
To get a sense of what’s next for this group, the stock charts below might hold some clues.
Start With the XLY
Starting at the highest level for stocks geared to consumer spending, a look at the chart of the Consumer Discretionary SPDR (XLY) shows a fund that’s sitting precariously on its 200-day moving average. Further, after nearly three months of underperformance, XLY’s 50-day MA has begun to arc lower. This sets up the possibility of a “death cross” — or a move in the 50-day MA below the 200 — with just a little more downside from here.
The weakness in XLY is an interesting development since none of the other nine sector ETFs are close to either a violation of their 200-day MA or a death cross at present.
Investors need to be alert to this, but also employ caution before reading too much into it.
So far in this bull market, the threat of potential breakdowns in various sectors usually has been resolved with a rebound that removes the danger and keeps the rally alive. For now, then, the burden of proof is on the bears.
Still, a meaningful breakdown in XLY may signal that the tide may be turning for the broader market as we head into the summer months.
Warning Flags in Retail Stocks
Drilling down further, the SPDR S&P Retail ETF (XRT) is further along in the process of rolling over, particularly after Tuesday’s weakness in Staples (SPLS), Urban Outfitters (URBN), TJX Corp. (TJX) and others, and this morning’s bad news out of American Eagle (AEO).
Notably, a number of retailers have missed on top-line revenues even as they have meet or beaten earnings — a sign of flagging fundamentals. Another two or three days of weakness will trigger a death cross in the XRT, which may provide an early warning about the fate of XLY. Notably, both URBN and TJX nudged below recent support levels on Tuesday, indicating that investors in these stocks may have seen enough.
Among individual stocks, Home Depot (HD) — the fourth-largest holding in XLY — would be among the names in jeopardy of underperformance if XRT indeed breaks down. HD stock has hit support in the $72-$75 range on eight occasions in the past year, meaning that it would face a serious loss of momentum below this level.
HD stock is approaching a death cross of its own right now. For now, this is a stock to watch, not to bet against, despite missing estimates on Tuesday. With a forward P/E of 15.2 and a yield of 2.4%, HD likely has limited downside even on a breakdown.