Weakness in retailers and other consumer-focused stocks led the major indices down last week. Despite a better-than-expected retail sales report, investors sold as a number of brick-and-mortar retailers delivered weak quarterly reports.
Macy’s, Inc. (M) ignited fears over consumer spending on Wednesday, when it reported its lowest quarterly sales since the recession. Management also cut its full-year sales forecast and made negative comments about the sector. (See the Trade of the Day.)
Even before this, though, a downgrade of Gap Inc’s (GPS) credit rating to junk status had retail stockholders jittery. Wal-Mart Stores, Inc. (WMT) led the Dow Jones Industrial Average lower Friday, falling 2.9%.
The Commerce Department said retail sales for the month of April were up 1.3%, boosted by strength in online retailers, autos and gas station sales. While sales from online retailers like Amazon.com, Inc. (AMZN) grew 2.4% last month and 10.2% in the past year, department-store sales fell 1.7% in the past 12 months.
Crude oil lost 1% Friday but closed the week up 3.5% at $46.21 a barrel. Gold advanced 0.1% to $1,271.90 an ounce on Friday but fell 1.6% for the week.
Bonds were in demand Friday with the yield of the 10-year Treasury note dropping to 1.71% compared with 1.79% a week ago.
At Friday’s close, the Dow Jones Industrial Average fell 185 points to 17,535, the S&P 500 lost 18 points at 2,047, the Nasdaq dropped 20 points to 4,718, and the Russell 2000 was off 6 points at 1,102.
The NYSE Composite’s primary exchange traded 879 million shares with total volume of 3.6 billion. The Nasdaq crossed 1.7 billion shares. On the Big Board, decliners outpaced advancers by 2-to-1, and on the Nasdaq, decliners led by 1.4-to-1. Block trades on the NYSE fell to 5,198 versus 5,274 on Thursday.
For the week, the Dow declined 1.2%, the S&P 500 lost 0.5%, the Nasdaq was down 0.4%, and the Russell 2000 fell 1.1%.
The S&P 500 closed below its 50-day moving average at 2,054.66 for the first time since late February. This puts a further breakdown into play.
If the potential minor head-and-shoulders top with a neckline at 2,040 and a high at 2,111 is confirmed with a break of the neckline, it will render a downside target of 1,969, nearly 4% below Friday’s close.
After 2,040, the next support line is the 200-day moving average at 2,012.31, then 1,995, and then the downside target of 1,969.
Conclusion
The breakdown in the retail sector is a very negative development. Retail sales account for about 70% of GDP, so even one very negative day can have an impact on the broader market.
Regular readers know that I caution against predicting a pattern’s development, especially one with a big market impact like a head-and-shoulders top, before all of its elements are in place. However, it appears this formation is developing on the S&P 500 with the index just over 6 points away from a breakdown at 2,040.
If the pattern’s target of 1,969 is hit, we could see a test of the January/February lows at about 1,810
The market is telling us to be cautious. Prepare for a mild sell-off by holding at least 50% cash.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
