RETAIL SALES GROWTH SLOWS -- MACY'S PLUNGES TO SUPPORT ON BIG VOLUME -- RETAIL SPDR CONSOLIDATES ABOVE SUPPORT -- 20+ YEAR T-BOND ETF MOVES TO NEW LOW -- BOND PROXIES AND FINANCIALS UNDERPERFORM BROADER MARKET -- XLU FORGES LOWER HIGH AND BREAKS SUPPORT
RETAIL SALES GROWTH SLOWS... Link for today's video. The Commerce Department reported a .2 percent rise in retail sales for July. Even though this gain was less than the June gain (.6 percent), it was still positive and still supports economic growth, albeit slow growth. To put this into perspective, Extra and Pro users at StockCharts can create a user-defined index and plot retail sales. Chart 1 shows the percentage change for Retail and Food Service Sales (RSAFS) with a user-defined index. This data comes from the St Louis Fed database (FRED). February is the only month this year when retail sales growth exceeded 1% (blue arrow). Last month's .6% increase marked the second highest increase this year. The remaining increases have been below .5 percent. I added a six month exponential moving average to smooth the series because it can be volatile on a month-to-month basis. As a long-term indicator, this EMA can be used to augment one's long-term outlook for the stock market. Retail sales support a long-term uptrend in stocks as long as the six month EMA remains positive (growth). The long-term uptrend is in jeopardy when the six month EMA moves into negative territory, as it did in early 2008.
Chart 1
MACY'S PLUNGES TO SUPPORT ON BIG VOLUME... Despite positive retail sales growth overall, some disappointments are starting to appear in individual stocks. Aeropostale (ARO) and American Eagle (AEO) recently warned and their stocks were punished in August. Today, Macy's (M) disappointed on guidance, which includes the ever important back-to-school season. Chart 2 shows Macy's testing its June low with a gap and sharp decline on Wednesday. Volume surged to its highest level in over six months. Despite this high volume decline, which could be a washout of sorts, the stock remains in a long-term uptrend and key support has yet to be broken. This is a big test for one of the most important retailers in America.
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Chart 2
RETAIL SPDR CONSOLIDATES ABOVE SUPPORT ... Despite weakness in Macy's and lackluster retail sales overall, retail stocks as a whole are still holding up rather well. Chart 3 shows the Retail SPDR (XRT) hitting a new high in early August. The ETF pulled back last week, but remains above first support at 80. A break below this level would be short-term bearish. The indicator window shows the price relative, which measures XRT relative to SPY. Relative performance peaked the second week of June as the price relative flattened. The indicator, however, has yet to break support, which would show relative weakness. Chart 4 shows the Consumer Discretionary SPDR (XLY) leading the market lower on Wednesday with a 1% decline. This key ETF is poised to test the late July low, a break of which would be short-term bearish. The indicator window shows the price relative forming a lower high and turning down this week.
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Chart 3
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Chart 4
20+ YEAR T-BOND ETF MOVES TO NEW LOW... The bond market continues to price in tapering and/or a strengthening economy as the 20+ Year T-Bond ETF (TLT) moved to a new low this week. Overall, the long-term trend for Treasury bonds remains down, while the long-term trend for Treasury yields is up. The downtrend in Treasuries supports an uptrend in stocks. Money moving out of Treasuries needs a home and the stock market represents an attractive alternative, especially when bond bulls are loosing money and stock bulls are making money. Chart 5 shows the 20+ Year T-Bond ETF peaking in early May and moving lower the last three months. The ETF hit a new low on Tuesday as Treasuries moved sharply lower. The July high and a small buffer mark resistance. The indicator window shows Aroon Down (red) moving above Aroon Up (green) in early May and hitting 100. This is an Aroon sell signal and remains in force until Aroon Green surges to 100. You can read more on Aroon in our ChartSchool article.
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Chart 5
As noted above, weakness in Treasury bonds means interest rates are rising. Chart 6 shows the 10-year Treasury Yield ($TNX) breaking above a major resistance level in late May and early June. After a surge from 1.6% to 2.7%, this yield moved sideways over the last few weeks. With Tuesday's plunge in Treasuries, the 10-year Treasury Yield moved back above 2.7% and this is hurting the interest-rate sensitive stocks.
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Chart 6
BOND PROXIES AND FINANCIALS UNDERPERFORM BROADER MARKET... Rising interest rates are hurting interest rate sensitive stocks and the so-called "bond proxies" in the stock market. Utilities, REITs and MLPs count as bond proxies because their high yields offer an alternative to bonds. Homebuilders are sensitive to interest rates because mortgage rates rise along with Treasury yields. It also seems that banking stocks are also feeling a little heat from rising rates. PerfChart 7 shows ETFs representing each of these groups. Notice that the S&P 500 ETF (SPY) is up over the last three weeks, but these ETFs are down. The REIT iShares (IYR), Alerian MLP ETF (ALMP) and the Home Construction iShares (ITB) are the weakest. In addition, the Finance SPDR (XLF) and Regional Bank SPDR (KRE) are down over the last three weeks. ETFs that are down when the market is up show both relative and absolute weakness.
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Chart 7
XLU FORGES LOWER HIGH AND BREAKS SUPPORT... The Utilities SPDR (XLU) has been the weakest sector since early May. In fact, the Consumer Staples SPDR (XLP) and XLU are the only two sectors that did not exceed their May high. XLP hit resistance near the May high, while XLU fell well short of its May high. Chart 8 shows XLU stalling near the 62% retracement and breaking short-term support with a decline below 38.5 today. The break means XLU formed a lower high in July and a downtrend is underway. Moreover, today's break signals a continuation of the May-June decline. The indicator window shows Aroon Down surging above Aroon Up to confirm the trend change. I am using 20-period Aroon with XLU because it is less volatile. A shorter look-back period increases indicator sensitivity.
