WAL-MART JUMPS TO RECORD HIGH -- RETAIL ETFS HAVE BENEFITED FROM PLUNGE IN CRUDE OIL -- LOWER END RETAILERS LIKE COSTCO, TJX, AND TARGET HAVE LED RALLY -- HIGHER END RETAILERS LIKE TIFFANY HAVE LAGGED BEHIND -- MACY'S HAS STRONG WEEK
WAL-MART SHARES EXPLODE... Chart 1 shows Wal Mart surging 4% today to break out to a record high. That's a pleasant change for the world's largest retailer which has hardly been a market leaders. The WMT/SPX relative strength ratio (above chart) is just starting to rise after falling for most of the last year. That's obviously a positive sign for the retail sector as well. Falling oil prices are one of the catalysts behind the recent surge in retailers. But there may be more to it than that. Lower end retailers appear to be getting most of the boost from falling energy costs. In addition to Walmart, that would include stocks like Costco, TJX, and Target. Let's take a look.
(click to view a live version of this chart)
Chart 1
FALLING OIL HAS BIGGER IMPACT ON RTH... The black line in Chart 2 represents the price of Light Crude Oil since the start of the year. The two rising lines represent the two most popular retail ETFs. As a rule, falling oil prices are good for retail stocks because it gives customers more discretionary money to spend. That's been especially true since the middle of June when oil prices started to tumble. Although both retail ETFs have risen since July, the Market Vectors Retail ETF (RTH) has done better than the S&P Retail SPDRs (XRT). Since the start of the July, the RTH (blue line) has risen 13% versus a 5% gain for the XRT. That being the case, I'm going to focus in this message on the RTH. Wal Mart happens to be the largest holding in the RTH (10%).
Chart 2
OIL DIRECTION IMPACTS RETAIL STRENGTH ... Chart 3 demonstrates the impact that oil direction has on the "relative" performance of retail stocks. As a rule, rising oil prices hurt retail performance. That was certainly the case between 2002 and 2008. Crude oil prices rose sharply during those five years (rising black line). At the same time, the relative strength ratio of retail stocks (RTH) divided by the S&P 500 fell sharply (falling green line). The relative performance of retailers improved dramatically after the oil peak in the middle of 2008 (see arrows). Since 2009, retail performance has generally suffered when oil prices rose, and did better when oil weakened. Chart 4 shows rising oil hurting retail performance between 2010 and early 2011. Falling oil prices helped retail performance in mid 2011 and early 2012. And again this year.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
FALLING CRUDE DURING 2014 BOOSTS RETAIL PERFORMANCE ... The inverse correlation between the direction of crude and the retail relative strength line can be seen very clearly in Chart 5, which compares the two lines over the last eighteen months. Rising crude during the first half of 2014 caused the RTH/SPX ratio (green line) to fall. The sharp drop in crude near the start of July coincided closely with an upturn in the retail relative strength line. Since July 1, the Market Vectors Retail ETF (RTH) has gained 13% (through yesterday) versus an S&P 500 gain of 4%.
(click to view a live version of this chart)
Chart 5
LOW END RETAILERS ARE MARKET LEADERS ... Another sign that falling oil prices are helping retailers is that most of the gains appear to be coming in "lower end" retailers. That's where the extra spending from lower energy costs would normally be seen first. Wal Mart is a very low end retailer which may help explain today's big breakout. Chart 6 shows Costco (COST) surging to new highs since midyear. Its relative strength line (solid line) has risen sharply since July. It's one of the strongest performers in the RTH. Chart 7 shows TJX also showing strong absolute and relative gains since July. Chart 8 shows Target (TGT) also showing strong gains since July.
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
(click to view a live version of this chart)
Chart 8
HIGH END RETAILERS LAG BEHIND ... "Higher end" retailers have generally lagged behind since oil peaked in July. Chart 9 compares five of them to the S&P 500 since the start of the year. Lower relative strength lines since July are seen in Williams Sonoma, Macy's, Tiffany, Michael Kors, and Coach. Apparently, customers who shop in those more upper scale stores haven't gotten as much of a boost from falling energy shares. Or maybe they just don't have to drive.
Chart 9
MACY'S HAS STRONG WEEK ... Macy's is starting to play catchup with other retailers. The stock jumped sharply yesterday on very strong volume, and is up again today. It's relative strength line (above chart) is starting to improve as well. It still needs to clear its summer high, however, to put it in record territory. New Yorkers may not be as concerned about fuel costs because they can take the subway to 34th Street. Besides, who resist shopping at Macy's at Christmas time.
