SET Monthly Issue November 2015

| November 17, 2015

Retail Stocks Ready For A Repeat Performance Of 2014 

Terrorism struck the civilized world again over the weekend.  This time the attackers hit Paris.

The horrific events and loss of life are tragic.  My heart goes out to those that have been impacted by these events.

Needless to say, terrorism is back at the top of the agenda for world leaders.  I hope for swift justice for those that planned and executed these cowardly acts.

As ugly and appalling as these attacks are, we are no longer surprised by them in a way we once would have been.  We already lost our innocence and we understand that there are risks that come with freedom.

The most important thing we can do as members of the civilized world is continue to live our lives as free men and women… albeit with a bit more caution and awareness than we did before.

The financial markets are taking a sober look at these events as well.  There’s sure to be an impact to the economy near these events.  And it could cause some negative impact to tourism and travel.

But these events don’t change the trajectory of the global economy.

There are things to be concerned about in the global economy.  Things like the strong US Dollar, weak commodity prices, and a slump in US imports ahead of the holiday season.

The big question right now is this… How much of the weakness is behind us and already baked into the cake?

Over the last week, the S&P 500 slumped lower after nearing the all time highs.  The pullback erased most of the gains over the last month.  And it sent the large cap index back below the 200-day moving average.

S&P 500

But the S&P 500 is still a full 13.5% above the August lows.  So, the correction and breakdown below support of the 200-day moving average needs to be taken with a grain of salt.

Don’t forget, the stock market is forward looking.  What happened last quarter or this quarter isn’t as big of a deal as what investors expect to happen six months or a year down the road.

Right now, there are signs that things are about to get a lot better for retailers after a weak 3rd quarter for consumer spending.

Here’s how you can profit from it…  

Trade Alert: Consumers Ready To Ramp Up Spending

Retail sales in the US are coming off of their third disappointing month in a row.  US retail sales grew 0.1% in October.

This has caught many investors by surprise.  They expected improvement in the labor market and lower fuel costs to have a positive impact on consumer spending.

But so far consumers haven’t cooperated.

We’ve seen many reports of weaker than expected customer traffic.  In short, there just weren’t as many people going shopping as expected.

As a result, we’ve seen retailers from Wal-Mart $WMT to Nordstroms $JWN cut their forecast for 2015 sales and profits.

Macro/Economic Trend:  A Low Bar To Clear

Here’s the thing about a weak quarter and low expectations…

They can have an initial negative impact on stocks.  We’ve seen this over the last week after Nordstroms and Macy’s $M reported poor third quarter earnings and their forecast for the end of the year had an overly negative spin to them.

These events also lower expectations and make it easier for companies to outperform expectations and trigger a significant move to the upside for these stocks.

In other words, they make for a good buy low and sell high opportunity.

What’s more, there have been solid earnings and an improvement in the number of customers visiting retailers like Kohls $KSS, JC Penney $JCP, Home Depot $HD, and even Wal-Mart $WMT.

And recent data from eMarketer projects a 5.7% jump in holiday sales this year to $885.7 billion.  That’s up from the 3.2% they projected earlier. And internet sales are expected to increase 13.9% to $79.4 billion, an increase of 8.3% from last year.

Simply put, I think expectations have become too negative toward retailers.  I’m expecting them to beat these lowered expectations and trigger a move to the upside that we want to profit from.

I’m recommending the Market Vectors Retail ETF $RTH.

Fundamentals:  A closer look at RTH

RTH tracks a market-cap-weighted index of the 25 largest US-listed companies that derive most of their revenue from retail.  It has an expense ratio is 0.35%.

The top five holdings and percentage weight for RTH are –

Company Name Ticker % Weight AMZN 15.47%
Home Depot HD 8.36%
Wal-Mart WMT 6.58%
CVS Caremark CVS 6.14%
Costco Wolesale COST 5.56%

Technicals:  The charts lead the way 

RTH is currently trading for $75.02.  It’s 4.3% below the 52-week high and 11.8% above the 52-week low.

Market Vectors Retail ETF

RTH enjoyed a big move to the upside in the 4th quarter of 2014.  It has been relatively flat for most of 2015.  It has been hugging support of the 200-day moving average since the market correction in August.

This looks very similar to the setup that catapulted RTH 25% higher last year.    

Trade Alert

BuyMarket Vectors Retail ETF $RTH up to $77.50

Recent Price: $75.02

Price Target: $90.00

Stop Loss:  $70.00

Remember:  A weak 3rd quarter and lower expectations for retailers have sent the stage for them to outperform in the 4th quarter.

Sector Snapshots

Consumer Discretionary (0.0%)

Consumer discretionary stocks were flat over the last month.  But there’s reason to believe retailers could lead a strong move to the upside in the 4th quarter.  We’re recommending the Market Vectors Retail ETF this month… trade details are above.

Consumer Staples (-2.4%)

Consumer staples slumped 2.4% over the last month.  The sector is still up about 2.2% this year.  And it could see an uptick from better than expected consumer spending in the 4th quarter.

Energy (+0.5%)

The energy sector took a step back as oil prices pulled back toward $40 per barrel.  The over-supply of oil hasn’t come to an end just yet.  But better days are ahead for oil prices and the energy sector.

Our Vanguard Energy ETF $VDE shot up 6% in the weeks following our recommendation.  But have fallen back as oil prices fell.  Give this trade some time, we’re in at a great price.

Financials (+2.9%)

Financials rebounded on hopes of a Fed interest rate hike coming sooner rather than later.  An uptick in interest rates would be beneficial to bank earnings.  But there are headwinds from the potential default of small oil producers that have used bank lending to fund US oil production expansion.

Healthcare (+0.7%)

Healthcare stocks are still unsettled following the wave of negative sentiment created by the storm of negative news about excessive price increases in the drug industry.

Biotech stocks are recovering after a major correction.  The good news is our ALPS Medical Breakthroughs ETF $SBIO is already moving higher again.  This volatile ETF should continue moving higher from here.

Our iShares US Medical Devices ETF $IHI has broken out above the short term resistance from the 50-day moving average.  There’s no doubt it, IHI is regaining its bullish momentum.  Next up are the highs from August.  A breakout should set this ETF on the path toward our price target.  Continue holding.

Industrials (+3.0%)

Industrials stocks are battling headwinds from a buildup in inventories, a strong US Dollar, and a drop in production.  However, they are benefiting from a drop in costs as the producer price index has fallen 1.6% over the last year.

Our US Global Jets ETF $JETS hit a new high of $26.06 this month.  We’re well on our way to our $30.00 price target.  Continue holding.

Technology (+2.1%)

Technology stocks moved up 2.1% over the last month.  The sector even made a new 52-week high this month.  Our PureFunds ISE Cyber Security ETF $HACK found a floor of support and it’s starting to move higher again.

Materials (+2.8%)

Materials stocks are up 2.8% over the last month.  The sector has benefited from some bargain hunting by investors in this sector.  But there are still headwinds from the US Dollar and weak commodity prices that should keep a lid on the sector until we see improvement in the global economy.

Utilities (-3.5%) 

Utilities retreated over the last month.  But it was the only sector up over the last week.   Utilities Select Sector SPDR $XLU is up 5.6%.  And it should continue to offer upside if the Fed doesn’t raise interest rates before the end of the year.  Continue holding.

Portfolio Changes

  • This month we’re buying RTH.

Category: SET Monthly Issues

About the Author ()

Comments are closed.