Technical Outlook: Keep an Eye on Retail
Investors and market commentators continue to focus their attention on the momentum action of the commodity and oil stocks, but amid all the hoopla, other sectors have quietly built solid bases and unexpectedly broken out to the upside.
The news media often focus on analysts and money managers promoting the hottest areas of the market. However, once everyone's attention is on a certain sector or set of stocks, many times that means the majority of the gains have already been realized.
I am certainly not a bottom-fishing type of money manager, but I do look for areas that have been ignored for quite some time and that, with the help of catalyst, could be pushed higher in the intermediate-term time frame of several weeks to several months.
Certain areas of the market turn can turn higher when economic conditions appear to be at their worst. That happens because all of the negativity has already been priced in, and the market is looking several months into the future.
Over the past few days while I was screening the market for strong earnings increases, I ran across some interesting situations in the retail sector. This was especially intriguing since the recent consumer confidence numbers that were reported in May posted a 47% year-over-year decline -- the sixth-largest drop in the index's history and a multiyear low.
That certainly wouldn't motivate many people to look at the retail sector, nor would the fact that the summer months aren't necessarily historically strong times for retail sales. However, we have $160 billion of retail checks currently going out from the government's stimulus plan, and that may be just enough help to get the sector a boost over next couple of months.
The chart below shows that the
Retail HOLDRs
(RTH) - Get Report
exchange-traded fund recently made a double bottom during January and March and then proceeded to trend higher. Currently, it's above the important support of the 50-day and 200-day moving averages that institutional money managers closely watch. In most cases, you want stocks to be trading above these two moving averages to increase your potential profits.
Also, notice that the green line in the bottom pane of the chart has been steadily holding near its highs since January of this year. That line represents institutional money flow in or out of a stock or index. I watch this indicator closely for any divergence of a price. In other words, if the price is moving higher, I do not want the money flow moving lower.
RTH |
Source: TC2000 |
Next, let's take a look at a couple stocks that are not too extended from their bases and that have pretty solid fundamental characteristics.
Polo Ralph Lauren's
(RL) - Get Report
recent fiscal fourth-quarter profit jumped as demand in Europe and other international markets helped offset increased promotions at U.S. department stores. You can see that the stock reacted very positively to the news as the price gapped above the $65 resistance level and held above the 200-day moving average.
The company continues to improve its fundamental strength with its plans to open one new store a month while at the same time keeping its debt-to-equity ratio very low - currently it's at 0.26. The company also trades at a significant discount compared to its industry on its price-to-sales ratio, which is 1.3 vs. the average of 2.4. I like to see the price-to-sales ratio below 1.5, so this is good news.
Technically, as long as the stock continues to hold above the $65 area, there's a good chance it could make an intermediate-term run-up into the upper $70s to low $80s.
RL |
Source: TC2000 |
Next up is
Dress Barn
(DBRN)
, an operation with more than 1,400 stores in 48 states. The company recently reported a solid quarter, with earnings that completely blew analysts' estimates out of the water.
The company still has some problems to deal with, such as decreasing net income that has significantly underperformed its industry average and low same-store sales numbers.
That said, it technically has a very attractive chart pattern after an almost 50% decline from July 2007 to January 2008. Since then, it has been in a basing pattern over the past few months, and it broke out nicely above resistance and the 200-day moving average on the recent strong earnings report. The key now will be for the stock to hold above the white line, which represents the 50-day moving average around $13.50. If it can do that, there's a good possibility of an intermediate-term move to at least the $18 level.
DBRN |
Source: TC2000 |
Retail certainly isn't a sexy area of the market, but with the large rebate checks that are on the way to consumers, along with the strong earnings per share numbers that some companies are posting, this area of the market may have more upside potential. In fact, while I was writing this column,
Tiffany's
(TIF) - Get Report
reported a higher-than-expected quarterly profit, boosted by strong sales in Asia and Europe.
Much of retail's success will depend on the health of the economy and the market in general, but beaten-down areas that are ignored can often offer investors a solid opportunity when the earnings picture starts to change.
At time of publication, Manning had no positions in 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;
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