Retail Is a Microcosm of the Broad Market

Is the Wal-Mart (WMT - commentary - Trade Now) downgrade by Goldman Sachs "right?" How about the Target (TGT - commentary - Trade Now) upgrade that comes with it? Is it time to desert Wal-Mart for Target because things are better? Because people will now shop at the "nicer" stores?

Boy, this is a tough call. For Action Alerts PLUS, we decided to sell WMT because we believe, as Goldman Sachs does today, that the marketplace will walk away from Wal-Mart because of the "less bad" analysis that Home Depot (HD - commentary - Trade Now) gave you last week. I just don't know if the shoppers or the stock buyers will flock to Target, especially because Target is up 16% for the year vs. Wal-Mart at down 11%.

If you recall, Home Depot issued upside guidance last week that was heavily skewed to costs but also a belief that things were getting "less bad." Had the company said "much better," then the desertion of Wal-Mart would have been a lay-up. No way would people stick with it if we know that things are cooking in this economy.

But I am torn on this one. We found out what drove retail out of the doldrums in the late fall: the collapse of oil and gasoline and heating bills (the latter never gets talked about but was huge). We then found out that it was further driven by stock market gains and the concomitant wealth effect, another overlooked issue. We also, I believe, had a psychological lift from the change from an extremely unpopular president to a very popular president, still one more unheralded issue.

I point these out as unheralded because if you just looked at the headlines about employment and housing, you would have to believe that the retail move didn't happen.

But it did.

So what's the problem with the downgrade of Wal-Mart and the upgrade of Target? I continue to think that housing's bottomed already. The stock market keeps rallying, although it seems like a breather is in store.

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