WMT's Number Won't Save Retail

Stocks got off to a fairly strong start this morning on the relief that the quarterly report from Wal-Mart (WMT - commentary - Cramer's Take) stores showed a rise in sales in the U.S. and abroad. Investors took this as a sign that consumers might not be as hesitant to spend as the market had originally feared, but the company stated that the uncertain economy will be a critical factor going forward.

Many investors are hoping that slower consumer demand will fade away with the relief from the federal tax rebates that the government has allocated to target the possibility of a sustained recession. According to a survey from the National Retail Federation, Americans will spend about 40% of their federal rebates that will start arriving in the mail in May.

The important question for retailers is how much consumers will be willing to spend their extra money on discretionary purchases such as home goods and electronics. If consumers decide to pay down debt and spend the money on low-margin basics such as food, then the plan for this money to boost the economy may have been wasted.

Retail HOLDRS

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Source: TC2000

The retail sector remains in a downtrend, and there is a lot of technical resistance that needs to be breached before a new uptrend can take hold. You can see from the Retail HOLDRS (RTH - commentary - Cramer's Take) that the primary downtrend has been going on for almost eight months.

Even today's encouraging report from Wal-Mart doesn't look like it is going to help this index very much in the short term. The only encouraging thing that I can see is that there is a divergence in that the institutional money stream is strongly trending higher.

The key will be for the actual price to start responding positively.

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Wal-Mart

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Source: TC2000

As I stated, Wal-Mart posted a 4% rise in its fourth-quarter net income, but the retail giant projected earnings heavily below analyst expectations. The low-price strategy of the company was expected to be one of the winners in a down economy. However, the company reported a very weak 0.5% gain in same-store sales for January, which was below the expectations of 2% growth.

The forward-looking earnings from First Call continues to remain positive, with earnings in 2008 expected to come in at $3.11, $3.44 in 2009 and $3.83 in 2010. Technically, you can see from the chart that price has been trading in a fairly tight range over the past three years.

Looking at this weekly chart, you'll notice that the prices are trading near the upper part of this range. You can also see that the institutional money at the bottom has made a significant move higher. The key now will be for the price to decisively break above the $52.50 level and hold to confirm a definite change in the trend.

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Home Depot

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Source: TC2000

Since homebuyers have pulled in their horns and are not purchasing new homes, you would think that maybe they may be investing in their current residence. However, we are not seeing that trend from large home-improvement retailers like Home Depot (HD - commentary - Cramer's Take).

According to First Call, the earnings estimates out to 2010 don't look that impressive. The company is expected to earn $2.30 in 2008, $2.15 in 2009 and a rebound to $2.37 in 2010. That is a far cry from the $2.83 at the company earned in 2007.

There are some positive changes coming from Frank Blake, who took over the company after the ouster of CEO Bob Nardelli and several board members. Blake must see some value in the company, because he made a very bold move and announced a massive 22.5-billion-share repurchase program in mid-2007.

You can see from the chart that the trend started to move higher in January and now has recently broke back down below the 50-day moving average. That move could be the beginning of a bottoming process if the prices move back down to test the January lows and hold.

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At time of publication, Manning had no positions in the stocks mentioned, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.