Trading typically slows during these lazy days of summer vacation, when paperback crime novels replace The Wall Street Journal as favored reading. Few investors think the market will go down during the next couple of weeks, but don't get complacent in your beach hammock. Indicators suggest that this overvalued market could soon face a day of reckoning.
The market's rise over the past three months hasn't been justified by corporate earnings growth. Underpinning the upswing in equities have been low interest rates and a syndrome known as "TINA" (There Is No Alternative). That could all change in coming days, as factors fall into place that make buying or owning stocks dangerous.
The Federal Reserve's reluctance to raise interest rates combined with generally positive economic data have pushed the S&P 500 (SPY) - Get Report into overbought territory. The legs of the seven-year bull market are getting wobbly.
The forward 12-month price-to-earnings ratio (P/E) of the S&P 500 is 16.9, compared to the 10-year average of 14.3. For the first time since 1999, all three major stock indices have posted record highs simultaneously. The number of stocks hitting 52-week highs exceeds the number hitting lows and sits at the upper end of its range. An interest rate hike could trigger the belated correction.
Federal Reserve chairwoman Janet L. Yellen said in a speech Friday that the Fed was moving toward boosting interest rates, citing a robust job market and an improved outlook for the economy and inflation. She stopped short of issuing a timetable, but a rate hike is imminent and investors aren't likely to respond well, even though they've seen it coming.
The second-quarter earnings season is largely over, with most S&P 500 companies surprising on the upside, but analysts had set low expectations. With 98% of companies reporting earnings to date, 71% have reported earnings above the mean estimate and 53% have reported sales above the mean estimate. The blended year-over-year earnings decline for the S&P 500 is 3.2%, hardly a stellar showing.
Nonetheless, upside earnings surprises in the second quarter have helped make retail and consumer discretionary stocks among the best-performing sectors year to date. The up-and-down retail sector this year has been functioning as a proxy for the health of the broader economy, so it's appropriate that retail has been a mixed bag in the most recent quarter, with some companies stumbling and others beating estimates.
Retail bellwether Wal-Mart (WMT) - Get Report showed that reports of its demise have been premature, when the "Big Box" chain reported second-quarter earnings per share (EPS) of $1.07, exceeding analyst expectations of $1.02.
The major retail stocks in the green year-to-date include Macy's (M) - Get Report (+10.23%); J.C. Penney (JCP) - Get Report (+48.50%); Costco (COST) - Get Report (+1.50%); Michael Kors Holdings (KORS) (+23.79%); Nordstrom (JWN) - Get Report (+2.91%); Dollar Tree (DLTR) - Get Report (+10.72); and Dollar General (DG) - Get Report (+5.05%). Amazon (AMZN) - Get Report , the e-commerce juggernaut that poses an existential threat to most brick-and-mortar legacy retailers, is up 13.78% YTD.
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The retail stocks in the red YTD include Wal-Mart (-2.15%); Abercrombie & Fitch (ANF) - Get Report (-16.22%); Tiffany & Co. (TIF) - Get Report (-3.58%); Kohl's (KSS) - Get Report (-6.49%); Target (TGT) - Get Report (-3.11%); and perennial loser Sears Holdings (SHLD) (-31.37%). The SPDR S&P Retail ETF (XRT) - Get Report is up 4.12% YTD, compared to 6.58% for the S&P 500.
Among the handful of stragglers scheduled to report second-quarter earnings this week are four key retailers: Abercrombie & Fitch and GIII Apparel (GIII) - Get Report (Tuesday), and Lands' End (LE) - Get Report and Lululemon Athletica (LULU) - Get Report (Thursday). ANF, GIII and LE are expected to post year-over-year declines in earnings. LULU is expected to post a year-over-year increase in EPS of 38 cents, versus 34 cents in the same quarter a year ago.
The worst decline is forecast for struggling Abercrombie & Fitch. The average analyst consensus is for ANF to post a loss of 20 cents per share, compared to a gain of 12 cents in the same quarter a year ago.
In the week ahead, market-moving economic data is on the docket that should directly affect retail stocks: Personal Income and Outlays (Monday); Consumer Confidence (Tuesday); ADP Employment Report (Wednesday); Chain Store Sales, Motor Vehicle Sales, Jobless Claims, PMI Manufacturing Index, Bloomberg Consumer Comfort Index, and Construction Spending (Thursday); and Employment Situation and Factory Orders (Friday).
The upshot: Don't get too comfortable in your beach chair. Volatility hasn't taken a vacation.
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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, he owned none of the stocks mentioned. Persinos appears as a regular commentator on the financial television show "Small Cap Nation." Follow him on Twitter.