USING SEASONALITY TO GET THE EDGE IN RETAIL STOCKS -- COMPARING ABSOLUTE VERSUS RELATIVE SEASONALITY -- SCTR HITS 12-MONTH MILESTONE FOR RETAIL SPDR -- GAP AND KOHLS ARE IN SHORT-TERM UPTRENDS, BUT UNDERPERFORMING
USING SEASONALITY TO GET THE EDGE IN RETAIL STOCKS... Link for today's video. It is a big week for the Retail SPDR (XRT) because the Commerce Department will report December retail sales on Tuesday before the open. The consensus estimate is for a .4% gain in month-to-month retail sales (less autos). A miss would likely lead to a continuation of Friday's surge in bond prices and decline in interest rates. Even though stocks held up quite well on Friday, a disappointment in retail sales could trigger some selling pressure because retail spending drives some two thirds of GDP. Before looking at the price chart for XRT, let's look at the seasonality chart for the Dow Jones Retail Index ($DJUSRT). Note that today's video includes a live tutorial on using our seasonality tool. Chart 1 shows seasonality going back fifteen years. Notice that March and October are by far the best months for this retail index. January and February also have an upward bias because the index closed higher 57% of the time in both cases. However, the average gain in January is just .4% and the index shows an average loss for February (-.8%). Perhaps this is because the market bids up retailers in anticipation of autumn and Christmas, and then takes profits after the events. Many retailers report earnings in the second half of February. Note that Best Buy (BBY), Gap (GPS), Macys (M), Kohls (KSS), Home Depot (HD) and Target (TGT) report the last week of February. Finally, note that May and June are by far the worst months for this retail index.
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Chart 1
COMPARING ABSOLUTE VERSUS RELATIVE SEASONALITY... Chart 2 shows relative seasonality by comparing the performance of $DJUSRT to the S&P 500. Two things stand out on this chart. First, notice that this retail index outperformed the market 79% of the time in October. This means October is the best month for the retail index on an absolute and relative basis. Second, notice that average outperformance is the highest in March (1.6%), even though the index outperformed the S&P 500 just 64% of the time. The bottom line is that both charts paint the same picture for retail: March and October are the two best months over the last fifteen years. This means we may see a seasonal dip in retail before getting a bounce in March.
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Chart 2
TECHNICAL RANK HITS 12-MONTH MILESTONE FOR RETAIL SPDR... Even though the S&P 500 hit a new high at the end of December, the Retail SPDR fell short of a new high and underperformed the broader market. Chart 3 shows XRT peaking just below its late November high and falling towards support this month. The June trend line, December low and a buffer mark key support in the 84-85 area. XRT is setting up for a big test ahead of the retail sales report. The indicator window shows the StockCharts Technical Rank (SCTR) moving below 50, and to its lowest level since January 2013. Notice how the SCTR broke down in late December as XRT underperformed over the last three weeks. Relative weakness in retail is not a good sign for the rest of the market and a support break would be negative for stocks overall.
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Chart 3
GAP AND KOHLS ARE IN SHORT-TERM UPTRENDS, BUT UNDERPERFORMING... There are two stocks within the Retail SPDR that chartists can watch for clues on this group. Chart 4 shows Gap Inc (GPS) finding support near the 62% retracement in December and edging above resistance in early January. Trading turned quite indecisive since the breakout and the stock fell on Monday. A move below the January lows would signal a breakout failure and reverse this uptrend. The indicator window shows the StockCharts Technical Rank (SCTR) wallowing below 20 since mid December.
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Chart 4
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Chart 5
Chart 5 shows Kohls (KSS) getting a breakout in mid December, but hitting resistance at 57 with a shooting star to start the year. The stock got a bounce last week, but fell sharply in early trading on Monday and is testing support in the 55 area. A break below last week's low would reverse the two month uptrend and argue for a move to support in the 50 area. The indicator window shows the SCTR moving below 50 in mid November and then hitting resistance at 50 the last two months Readings below 50 indicator that the stock is in the weakest half of the S&P 500. You can read more about the StockCharts Technical Rank (SCTR) in our ChartSchool article
SEASONAL PATTERNS WILL SOON TURN NEGATIVE FOR BANKS ... It is also going to be a huge week for the finance sector, big banks and regional banks because earnings season begins in earnest. Note that JP Morgan (JPM) and Wells Fargo (WFC) report on Tuesday. Bank of America and Schwab (SCHW) report on Wednesday. American Express, Citigroup (C) and Goldman Sachs (GS) report on Thursday. Bank of New York Mellon (BK) and Morgan Stanley (MS) report on Friday. Before looking at the price chart for XLF, let's take a look at the seasonal tendencies. Chart 6 shows the seasonality histogram for the DJ Bank Index ($DJUSBK) over the last fifteen years. Two months stick out on the negative side: February and June. Notice that the bank index was up only 36% of the time in February and only 21% of the time in June. Seasonally, the best month was by far December. The index was up 1.34% last month, but that was actually below its average (3.6%). Also note that even though the index was up 57% of the time in January, the average gain was actually a loss (-1%). Chart 7 shows a relative performance seasonality chart for the index.
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Chart 6
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Chart 7
BREAKOUTS ARE HOLDING FOR THE FINANCE SPDR ... Despite negative seasonal patterns in January and February, the Finance SPDR (XLF) remains in an uptrend after a series of breakouts. First, chart 8 shows XLF break triangle resistance in late October and then correcting with a falling flag. The ETF broke flag resistance in early November, formed another flag in December and broke out in mid December. The ETF is up over 12% from its early October low and in an uptrend overall. Broken resistance in the 21.50 area turns first support. Broken resistance and the December lows mark key support in the 20.75 area. The indicator window shows XLF going from relative weakness to relative strength in November. Notice how the price relative (XLF:$SPX ratio) bottomed in early November and rose the last two months.
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Chart 8
KRE TESTS WEDGE BREAKOUT ... Chart 9 shows the Regional Bank SPDR (KRE) with a breakout in early October and big run the last three months. Note that KRE is up over 14% from its early October low. As with the broader market, it is overbought on the three month timeframe and ripe for a pullback or consolidation. The wedge breakout in late December is the most recent bull signal and broken resistance turns first support in the 40 area. A move below last week's low would signal a breakout failure. I will use the December lows to mark key support in the 39 area. A break below these lows would reverse the three month uptrend. The indicator window shows KRE relative to the S&P 500. KRE outperformed from mid September to late December as the price relative. The ETF, however, has started underperforming as the price relative moved lower the last three weeks.
