Retail Concerns

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Is the market losing steam after the recent run? The market will turn its attention on the holiday sales, Black-Friday, and Cyber Monday. However, lurking behind the excitement and expectations of the holidays will be the Federal Reserve and rate hike expectations at the last FOMC meeting of the year on December 15-16th.


Retail Concerns?

As I pointed out in the previous article that one strong headline Labor Report is not going to determine Fed monetary policy or changes in interest rates. I had also posted a litany of reasons why the Fed will remain accommodative. Additionally, we have one more Labor Report (for November) reported in the first week of December, prior to the FOMC meeting.
Yet there is another looming concern, beyond whether or not the Fed will hike rates and that is the REAL economy. Earnings, in general, have seen weaker top line revenue and sales and forecasts have been lowered.


GAP foreshadow?


courtesy of wikipedia

GAP earnings report showed same-store sales fell 15% at Banana Republic, 4% at GAP, and the only increase was at their discount Old Navy with 2% increase. Total revenue fell $60m for the month of October from a year ago. GAP did indicate, as has others, that the dollar strength has been a headwind for international sales, but that doesn’t address the domestic weakness. Is the GAP story the norm or an outlier? If we look at broad top-line reports it is similar across the retail space, the only difference is that some retailers have managed to cut costs and boost bottom line profits. Yet, there are some good growth stories out there in retail, but those are expansion growth not about organic same store sales.
We need to pay attention to top-line revenue/sales as well as forecasts for retail earnings and we have some big names coming up: Macy’s (M), Nordstrom (JWN), Kohl’s (KSS), Wal-Mart (WMT), Home Depot (HD), Target (TGT), to name a few.


Buy Back Factor

Share buy-backs have been an effective way to mask the weaker top-line revenue and sales. If we back in the 100s of billions in share buy-backs, it only perpetuates the false sense of security as it bolsters bottom line earnings per share (EPS). How much of the EPS rise has been contributed to share-buy backs? It is certainly a contributing factor and I wager larger than we think. I wrote it about it: Shrinking Stock Market


NFIB report

The National Federation of Independent Business (NFIB) offers some great data and reports on the small business community. While the vast majority of small businesses are not listed stocks that we can trade, understanding the health of the small business is important as it gives us a real measure of our economy. It is important to remember that small business is the largest employer in this nation, more than 60% of people employed in this country are in small businesses that are not publicly listed stocks. Drive down any street in any town – you will pass hundreds of small businesses. Unfortunately, the data is not given much weight because it doesn’t represent the big name businesses that we put far too much weight in.

Here are some interesting infographics from the NFIB survey

I suggest reviewing the entire survey here: NFIB Economic Trends 2015

Add the concern about weakness heading into the holidays, with my already long list of reasons as to why the Fed will not raise rates and I think it is fairly certain.


Support & Resistance

INDU 17,600
We could get into a consolidated 17,600 – 17,700 range for a bit as we absorb some earnings heading into the Thanksgiving holidays. That could form the flagging area and what many call the “second shoulder” of a “head and shoulders formation”. For me that just translates into a reprieve of the rally and a lack of new buying power. If that is the case and weakness escalates concerns, we could see a sharp drop from 17,600 to 17,200 before we find support. For now, I think consolidation is in the cards and if we hover closer to the 17,600 level – look for that “second shoulder” … note: I am not much of a technical guy – so take it for what it’s worth.

NDX 4600
All I can see is a cliff and a drop to 4500. So I am hedged – even over-hedged.

SPX 2060
Much like the Dow Jones, the S&P 500 is in this consolidation area of 2060 – 2080 – possibly forming that “second shoulder” and if it drops – then 2020-2040 will be visited quickly. VIX is in the 16 range, which is priced just shy of where it should be – if we are expecting to see a jolt lower.

RUT 1180
The Russell never took off as the other indices did and that reflects a lack of order flow into the equity markets. If we crack 1180 and visit 1160 – that could be the sign that the rest of the indices are going to drop in the short term before finding support.


I think the rally has gotten ahead of itself. While I am not expecting a crash, I think we are going to see the market stall and fall back in the short-term. The decline may only be short-term and not too much – because the Fed will NOT raise rates and that could renew the rally again – as the market gets another jolt of cheap money and low interest.

Of course – there is only so many times we can rally off of zero rates and more stimulus. At some point bad news is just bad news. We are not there yet – but we are getting close.

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