1 Reason to Remain Cautious About this Rally

The fiscal cliff relief rally didn't extend to every sector

   

Video Transcript

We’ve seen some press about it today, but not a lot about the payroll tax hike. That changes for most individuals who now are winding up paying an additional 2% of their income on the first $114,000 worth of income each year. That’s the social security tax that your employer pays half of and you pay half of, and the employee portion goes from 4% to 6%.

That’s actually pretty material if you think about it. If we assume nothing else changes, an individual who makes $50,000 a year is going to be paying $1,000 extra in payroll taxes because of that change. What does that tell us? If, in fact, individuals and families who are making less than $114,000 a year are looking at basically taking home 2% less of their paycheck. On the aggregate, that’s actually a pretty big deal, especially in a low-growth environment.

The reason why that’s such a big deal is because you’ve got an economy that’s consumer driven. It’s still definitely in a very weak recovery where that kind of thing can really impair it and we saw that show up in prices on Wednesday.

Let’s take a look at an ETF, the S&P Retail ETF (NYSE:XRT). Its main holdings are Office Depot (NYSE:ODP), Netflix (NASDAQ:NFLX), OfficeMax (NYSE:OMX), Brown Shoe Co. (NYSE:BWS), O’Reilly Automotive (NASDAQ:ORLY), Abercrombie & Fitch (NYSE:ANF), Stage Stores (NYSE:SSI), Barnes & Noble (NYSE:BKS), GameStop (NYSE:GME) and Dillard’s (NYSE:DDS).

We’re not trading anything in the retail sector right now. There are a couple of stocks we’re eyeballing, but nothing’s really compelling right now. I think we may see something in the near term, but I want to see where prices actually settle. Are we going to see the S&P 500 stop at resistance, or is going to break through?

I’m inclined to suspect that we’re going to see at least a temporary stop at resistance, a little bit of a pull back, some profit-taking off of the last two sessions, but we’ll see how that plays out. However, on a day the major indices were up more than they’ve been up in 18 months, we saw a couple of outliers that were doing some interesting things.

The first was retail. For those of who aren’t doing technical charting, you may not know this but a candle is typically filled in solid if the open is above the close, meaning that the stock – in this case, XRT – opened higher and it closed lower. That means that traders were bullish; they bid it up right at the open, but then sold all day.

In fact, the lows were almost equal to Monday’s highs. That is a bit of a concern that, despite the fact that it was a bullish day, you saw retail stocks essentially not going anywhere. That does present some interesting opportunities. I think it’s probably the most significant thing just based on Wednesday’s data alone that justifies a somewhat balanced, if not a slightly bearish biased outlook.

Investor Place advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.


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