Retail and Others Test Support Short Term

What is wrong with the following statement from McDonald’s CEO? “It is a challenging environment!” They are the king of the dollar menu and cheap fast food. If they are finding the current retail environment challenging what is going to happen in the balance of the consumer world? Fossil missed big as well reflectiing poor sales in Europe. Big shock! But, they were much worse than expected and it forced them to lower forward guidance. The stock fell almost 40% on the news. The ripple effect through the retail sector on the news was evident pushing XRT, SPDR Retail ETF down 1.1% on the day, and tested support at the $58.75 level before closing at $59.68.

Retail has been a primary leader for the broad market indexes. If this support level breaks and the downside accelerates it is bad news for the broad market indexes. XLY, SPDR Consumer Discretionary ETF looks very similar with a test of support on Tuesday near the $43.60 level. The volume was nearly twice the average volume showing the building nervousness from investors relative to the future of the sector and market in general. The chart below reflects the current move and key support levels short term. The technical data is important, but equally important, is the sentiment towards the sector is shifting to the negative side.

Others in the sector have experienced equal challenges of late. Wal-Mart’s scandal in Mexico, Target slipped on same store sales, Costco has lost favor with investors over sales and JC Penny’s has tumbled from new highs. The speciality retail stocks are struggling as sales slipped last month. The question investors face relative to the recent drop is emotions versus data. The same store sales data is only one month. The economic data showing slowing growth has been two months. The confidence and conviction of investors less than a month. The latter short term is the key ingredient to how the sector will preform in the short term The fundamental data points will determine how the sector performs longer term. The current flavor of the month is short term for investors and it could drive the sector lower as the negative outlook, or perceived outlook, gains momentum.

Technically our stops should be in place to take an exit on the break of support. Fundamentally we should track the real underlying story for the sector. If the news is better than the prices reflect, look for the opportunity to put money to work in the sector as the dust settles and the opportunities present themselves. Don’t allow your fundamental outlook to cloud what the technical universe is voting for short term. Prudent investing wants to avoid damage created by emotions, and profit from the over-reaction as the opportunity presents itself.

Retail is not alone as a sector testing key support levels. Looking at the charts of the ten major sectors of the S&P 500 index we find that seven are at the same levels of testing support. Two, consumer staples and utilities (defensive sectors) are still near the current highs. The one sector breaking support this week is energy (I covered here yesterday) attempted to hold the key support level with a rally into the close on Tuesday. If one breaks clearly the others will likely follow short term. They are like the riddle, if there were ten cats in a boat, and one jump out, how many would be left? None, the rest were copy cats! Watch support and remember original thinking among investors isn’t the norm… most are copy cats. Watch your downside risk short term.