RETAIL SPDR JUMPS TO A FOUR-MONTH HIGH AND HAS BECOME A NEW MARKET LEADER -- RETAIL LEADERS INCLUDE MACYS, UNDER ARMOUR, AND NIKE -- RISING BOND YIELDS BOOST THE DOLLAR WHICH HELPS SMALL CAP STOCKS -- RUSSELL 2000 HITS A NEW RECORD
S&P RETAIL SPDR GOES FROM LAGGARD TO LEADER... A strong April retail report yesterday was credited with helping push bond yields to the highest level in seven years. That's because it showed strong consumer spending which is two-thirds of the U.S. economy. Retail stocks must have gotten the message because they're one of today's strongest groups. The weekly bars in Chart 1 show the S&P Retail SPDR (XRT) surging to the highest level in four months today. It's also showing new market leadership. The big story in Chart 1 isn't just that retailers are acting better this year. It's how bad they did over the past three years. Chart 1 shows the XRT basically trading sideways since the start of 2015. Since April of that year, the XRT has lost nearly -3%. During that same three-year period, the S&P 500 rose 32%. The red line in Chart 1 shows the XRT/S&P 500 relative strength ratio falling during most of that period. Until last November. Since the start of that month, the XRT has gained 21% versus a 5% gain for the SPX. In other words, the XRT has gained four times more than the S&P 500 over the last six months. The red boxed area shows the ratio rising to the highest level in a year. That means that retailers have gone from one of the market's weakest sectors over the past three years to one of the strongest this year. That makes them a prime candidate for investors looking to do some bargain shopping.
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Chart 1
MACY'S, UNDER ARMOUR, AND NIKE ARE RETAIL LEADERS... Today's retail leader is Macy's (M). The weekly bars in Chart 2 show that stock having risen above a three-year downtrend line and now trading at the highest level in more than a year. Its relative strength ratio (solid area) is also rising. The weekly bars in Chart 3 show Under Armour (UA) in another turnaround story since last November. Today's jump puts the stock at the highest level in ten months. Its rising relative strength line (gray area) also shows it to be a market leader this year. The weekly bars in Chart 4 show Nike (NKE) climbing to a new record. Its relative strength line (top box) has also been rising since the fourth quarter of last year. Those three stocks are prime examples of the upside turnaround in the retail group that has taken place this year. That's a good sign for the U.S. economy and is helping boost Treasury yields and the dollar. And that in turn is giving an added boost to domestically-oriented small cap stocks.
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Chart 2
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Chart 3
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Chart 4
RISING DOLLAR BOOSTS SMALL CAPS ... One of the side effects of the 10-year Treasury yield rising to the highest level in seven years this week is a stronger dollar. The spread between U.S. and German yields has reached the highest level in three decades which is dollar friendly. My May 1 message explained that a rising dollar was hurting the relative performance of large cap stocks. I'm revisiting that story today but from the standpoint of stronger smaller stocks. The black line in Chart 5 is a "ratio" of the Russell 2000 Small Cap Index divided by the S&P 500 Large Cap Index over the last two years. The green line is the PowerShares Dollar Index (UUP) which rose today to the highest level since last November. The two lines usually trend in the same direction. A weaker dollar during 2017 caused smaller stocks to underperform large caps (a falling ratio). The dollar upturn this year, however, is pushing the ratio higher which reflects stronger small cap performance. Small caps benefit more from a stronger U.S. economy, while large multinationals are more dependent on weaker foreign economies. A stronger dollar also makes their exports more expensive. What makes this intermarket linkage so timely is that the Russell 2000 Index hit a new record high today. That also carries good news for large caps which should follow small caps higher but, with a stronger dollar, probably at a slower pace.
