Four Retailers Portend Weakness

This column was originally published on RealMoney on Jan. 10 at 10:01 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

I expect the retail sector to underperform throughout 2006.

The basis for this analysis, which I have discussed before, bears repeating. The yields on the 10-year Treasury bond remain at best in a range with the significant risk to the upside.

Consequently, we should not expect to see lower mortgage rates, which commonly are pegged to the 10-year Treasury. This will put pressure on the housing industry, which will pressure the consumer who has been dependent upon increasing home values.

Consumers who are levered to lower interest rates will no longer be able to use their homes as the proverbial ATM machine. Refinancing, buying homes for speculative purposes, and year-over-year appreciation are expected to be down for 2006.

Furthermore, any rise in interest rates could easily crimp the spending habits of those homeowners with adjustable-rate mortgages or home equity loans.

All of this suggests that the consumer's spending habits may be a bit curtailed for 2006. And if the consumer isn't spending, then retail should be hurting. Now this isn't to suggest that every consumer will stop spending or that every retail company should be avoided.

For example, electronic retailers like Circuit City(CC Quote) and Best Buy(BBY Quote) look very strong, and apparel stores like Limited(LTD Quote) and Nordstrom(JWN Quote), look very strong as well.

But it is clear from the price action in certain retail stocks that the markets are expecting some retailers to underperform.

Even with the market's great performance this past week, the retail sector was a noticeable laggard. The four stocks highlighted below are vulnerable to further downside.

The Sports Authority

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Source: TheTechnicalTake.com

Above is a weekly chart of The Sports Authority(TSA Quote). Price made a lower high and failed to get above the resistance level at $32.71. Last week, prices crashed not only below an internal trend line but also the 40-week moving average on increasing volume. I find breaks above or below old trend lines can be pretty significant. In any case, I believe that prices will find support at $27.31, and there is risk to $24.46. Shares closed Monday at $30.00.

K-Swiss

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Source: TheTechnicalTake.com

K-Swiss(KSWS Quote) is a marketer and designer of footwear, apparel and accessories.

In its weekly chart above, the three red arrows over the price graph highlight three consecutive up thrusts in price that were not significant. This means the price momentum was not strong enough to print a significant up thrust in price. In any case, three failed thrusts higher is pretty typical of a distributive top. In fact, prices gapped below the trend line (highlighted area) back in August. Prices eventually retraced to the underside of the trend line, which served as resistance.

This past week prices accelerated through the 40-week moving average on increasing, but not above-average, volume. The 40-week moving average, which is starting to roll over, may be an ideal place to initiate a short position or to place a stop loss. An initial downside target would be the support level at $28.23. Shares closed Monday at $30.70.

Zale Corporation

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Source: TheTechnicalTake.com

Zale Corporation(ZLC Quote) is a jewelry retailer in North America, and its weekly chart shows price is breaking down out of a massive two-and-half-year top on very heavy volume. The 40-week moving average is rolling over and resistance is between $26 and $27. I expect prices to find support at $23, and most likely at the $20 level. Shares closed Monday at $25.66.

Wal-Mart

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Source: TheTechnicalTake.com

No analysis of the retail sector would complete without a look at Wal-Mart. In many respects, Wal-Mart has come to define the American consumer and the consumer economy, yet for the last two years, Wal-Mart has severely underperformed the major indices. Is there a macro significance to this negative divergence? While you would think that as a Wal-Mart or General Electric goes, so goes the economy. But that hasn't been the case the last several years.

A weekly chart of the retailing giant is shown above. Wal-Mart has been traveling in a well-defined downtrend channel. Last week prices gapped lower on significant volume. I do expect prices to find support at the $43 level, and a bounce back toward the 40-week moving average and beyond to the significant up pivot at $50 would not be surprising. Shares closed Monday at $45.71.