U.S. equities dropped hard on Friday despite a better-than-expected April retail sales report. The problem is the ongoing flow of disturbing earnings results from retailers such as JCPenney Company Inc (NYSE:JCP), which dropped 2.8% in volatile trading after reporting a top-line miss and negative comp-store sales growth.
In the end, the Dow Jones Industrial Average dropped 1.1%, the S&P 500 lost 0.9%, the Nasdaq Composite wafted down 0.4% and the Russell 2000 closed the day out with a loss of 0.6%. Treasury bonds mostly strengthened, the dollar was mixed, gold gained 0.1% and oil weakened, losing 0.9% to close at $46.29.
As a result, the Dow has taken out major technical support: The 50-day moving average has been lost in a major way for the first time since late February. This sets up a possible retest of the 200-day moving average last touched in March.
The selling pressure is widening with all the major sector groups finishing in the red. Financials led the way with a 1.3% loss followed by energy. Bank of America Corp (NYSE:BAC) dropped 1.8% to push the June $14 BAC puts recommended to Edge Pro subscribers to a gain of nearly 30% since recommended on Thursday.
Nordstrom, Inc. (NYSE:JWN) fell 13.4% after missing Q1 earnings per share estimates by 43% on a 1.7% drop in comp-store sales. Forward earnings guidance was cut by nearly 20%. Burger joint Shake Shack Inc (NYSE:SHAK) gained 9.7% on better-than-expected quarterly results driven by a 9.9% rise in comp-store sales.
The bad news started last week, when fitness wearables maker Fitbit Inc (NYSE:FIT) dropped nearly 19% on May 6 on a deceleration in unit sales growth and weak second-quarter guidance. Action camera maker GoPro Inc (NASDAQ:GPRO) was also hit hard on inventory write downs. These are supposed to be two of the hottest consumer areas of the economy right now. And yet the magic seems to be fading.
More negative headlines followed. On May 8, the New York Post reported JCP was taking emergency measures including slashing payroll in light of light April sales. All was in the context of weak U.S. economic data, including soft consumer spending (as the savings rate rises), an underwhelming Q1 GDP growth report, a tepid April jobs report and ongoing stalling in the manufacturing sector.
On Monday, Gap Inc (NYSE:GPS) was hit by a surprise same-store sales decline in April of 7% vs. the 0.5% gain expected. Shares have since dropped nearly 24%. On Tuesday, watchmaker Fossil Group Inc (NASDAQ:FOSL) plunged 25% in extended trading after reporting a top- and bottom-line miss.
On May 11, Macy’s, Inc. (NYSE:M) 15.2% after reporting a 7%+ drop in sales in what was its fifth consecutive quarterly sales decline. Forward guidance was cut as well. Shares dropped all the way back to 2012 levels. And on May 12, Kohl’s Corporation (NYSE:KSS) lost 9.2% after reporting a Q1 earnings miss on weaker revenues and a 3.9% drop in comp-store sales (vs. 0.2% growth expected).
The trend is clear: Americans just aren’t shopping, possibly because of the 50%-plus bounce in wholesale gasoline prices from the mid-February low.
Yet, adding some confusion was a strong April retail sales report driven by nice increases in spending on clothing, autos and furniture. The result was the largest monthly gain in spending in more than a year. One that will likely boost Q2 GDP growth close to a 3% annualized rate according to Capital Economics.
For now, stocks seem to be believing the dour story coming from retailers themselves, rather than the one from government statisticians.
As a result, I continue to recommend defensive positions such as the ProShares Ultra 20+ Year Treasury Bond (NYSEARCA:UBT) that is up 4.3% so far this month for Edge subscribers.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
