The broad line retail sector is one where the charts are telling us the fundamental story of weakening US consumers. This is happening in much the same way that the US homebuilder’s charts were telling of a crumbling housing market in the third quarter of 2005. While the intermediate term charts were painting the bearish picture, the news was generally good, while short term rallies were sharp and convincing. But then it was wise to focus on the intermediate term and ignore day-of-earnings rallies and bullish economic data from the government. Remember all the talk of housing “scraping along the bottom” you heard around the end of year? It is likely that similar erroneous rhetoric about the retail environment will be put out there for the investing public. Also, rallies will be sharp and convincing while the longer term trend will be down.
Below is the weekly chart of the US homebuilders from July of ’03 to the present. The index formed a regular head-and-shoulders reversal, which was completed when the neckline was broken at about 850, and confirmed when support was broken at about 780. After bottoming at 525, a convincing rally from July of ’06 to March of ’07 created what appeared to be an excellent selling opportunity. The black rectangles show the sharp and convincing rallies that are occurring in a secular housing bear market. “Scraping along the bottom” was the rhetoric that culminated the final burst back to 800 in January of ’07. In spite of all of this happy talk, the technical support/resistance level of 780 proved to be bigger and better than what was reported as news.
I expect similar action to occur soon in broad line retailers. Of the 9 stocks considered, 4 have generally bullish chart formations and 5 are bearish.
Still Bullish – Target, Dillard’s, Macy’s and Saks
After it formed and completed a double bottom at 45, Target maintained support at 57.5, and has since surged to as high as 67.5 in recent weeks. Its advance has been with lower trading volume. Still the bullish trend deserves the benefit of the doubt.
Dillard’s has been rising at a slower rate, and higher volume selloffs in recent weeks suggests possible near term technical weakness. But the long term uptrend deserves the benefit of the doubt. (Dillard’s is a fairly consistent subject of takeover rumors.)
Also the subject of takeover rumors, similar to Dillard’s, Saks is in an uptrend with a recent loss of momentum. The top may have occurred in late May when an extremely high volume selloff moved the stock well off of its high. It is of concern that the 10 week moving average has turned down and the price is below this moving average. Again the up trend deserves the benefit of the doubt.
Also the subject of takeover rumors, the chart of Macy’s is bullish as the linear uptrend is still intact. A high volume selloff is the spring of ’07 is of concern.
Bearish are Sears, JC Penny, Nordstrom’s, Kohl’s, and Gottschalk’s.
There are 3 features of the Sears chart which suggests a fairly young downtrend.
1. A high volume selloff this week that decisively brought the price below both the 10 and 40 week moving averages. (Red arrow in volume chart.)
2. A “black cross”, which is the shorter term (10 week) moving below the longer term (40 week) moving average. (Red arrow in price chart.)
3. Failure of former resistance in the low 160’s to hold as support. This is indicated by the red horizontal line.
4. Formation and completion of a head and shoulders pattern. The neckline is shown by the blue horizontal line.
The same bearish story is told in a similar manner by the point-and-figure chart of Sears. A new downtrend has been formed.
How to know if this analysis turns out to be wrong? Sears would have to reclaim the necklines and the support/resistance levels indicated in the chart. 170 would invalidate this analysis.
Four important bearish technical events occurred practically simultaneously for JC Penny:
The analysis fails if JCP closes decisively above 75.
Nordstrom appears to have broken a descending triangle where 50 was a key support level and this occurred simultaneously with its black cross. A decisive reclaim of the horizontal line invalidates the new downtrend.
Unlike Sears, JC Penny, and Nordstrom, Kohls Corp. has not completed a technical reversal pattern. Still, the price now sits below the both the 40 and 10 week moving averages and a black cross occurred this week. The fact that the stock has not completed its reversal and it is oversold, suggests there may be some more life in this stock, especially if the bullish general market trend continues. But if the neckline (shown) is broken, a new downtrend will be confirmed.
Recent weeks have taken Gottschalks from a high of about 15, down to 11. The technical picture is mixed for GOT.
What I think is that the US consumer is slowing. What I know is that three important broadline retailers – Sears, JC Penny, and Nordstrom - have completed bearish reversal patterns. Whether the technical patterns are reversed will determine whether what I think is correct or not. Retailers rallied strongly on high volume and stocks closed near their highs of the day. Strategically, it is important to note that one of the most popular household names and widely owned stocks – Cisco – has completed a bullish 5 year cup with handle pattern by breaking to a multi-year high on over 2 times an average day’s volume. Here it is…
Returning to thoughts and knowledge.
Here’s J.C. Penney’s run back to the neckline near 75, most of which was accomplished in today’s action.
Here’s Nordstrom’s run back to the descending triangle’s bottom.
While today’s rally in the retailers was sharp and convincing, it is appropriate to consider these rallies in the context of similar action in the homebuilders described above. The JCP and JWN charts are important ones with key technical lines of demarcation. It is dangerous to invest in what you think and not in what you know. (It is also dangerous to invest in what you think you know.)
While there are some weak sub-sectors within the general category of US retail, it is important that the retail ETF (RTH) reached a 6 year high today on double the average daily volume. The retail sector is leveraged to the wealth effect and the wealth effect is leveraged to asset prices such as real estate and the stock market. When people feel wealthy, they will spend and vice versa. If retail stocks don’t keep pace with the bullish market indices, this will be especially bearish for retail stocks when (if?) the market tide turns from bullish to bearish.
Target and J.C. Penney’s led the broadline retailers higher. Kohl’s bounced off of the proposed neckline depicted above. But not all was well with the broadlines as Gottschalks got severally punished on poor results. In spite of all the good news and a rallying stock market, Sears couldn’t get out of its own way, Macy’s was down, and Saks was down in spite of an upgrade on “Fast Money” last night.
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