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The slowdown of the US consumer was showing signs of being foretold in the stock market even before hurricane Katrina, as key consumer stocks were showing technical weakness. The rising tide of broad-based positive stock market breadth was lifting practically all consumer stocks through June and even into July. It was easy to make money by owning practically any consumer stock at that time. In the Wrap Up July 7th, I pointed out that for the retail sector, it was “all good” for consumer stocks. Even low quality stocks such as Bon Ton Stores, Gottschalk’s, and Saks were breaking into new high ground. Was the retail market as bullish as it appeared on the surface? From the soft underbelly of the teenager clothing retail sector, the stock of Aeropostale (ARO) was trying to break into new high ground. In the “Today’s Market” section on July 7th, I referenced the one year daily chart of ARO. As you can see from the July 7th chart, in spite of an apparent raging bull market in that sector, ARO was only in a well defined trading range and had just failed in its 4th attempt to break above 35, by gapping down. Swing trading principles would have suggested that a decisive break above 35 would have carried the stock up to at least 45.
Yet the stock failed in this attempt by gapping down on July 7th, and as such, it was likely to swing back to the lower end of its trading range at about 25, which it also did in the next few weeks. Perhaps if market conditions would have stayed bullish, this stock would have given swing traders the opportunity to get on the “UP elevator” and ride it back to 35. Yet market conditions have since deteriorated, and as a result, so did the stock chart of Aeropostale as it tried to hold 25 before breaking down.
As it broke out of its box to the downside, ARO is probably now heading to the mid teens or lower. The laggard of the sector, Aeropostale, was signaling the onset of the bear market in many other stocks in the sector. The depth and consistency of the downtrends throughout the sector as seen in the 2-year charts make it clear that it is time to say “Hello” to the bear market in these consumer stocks.
Best Buy (BBY) is the leading blue chip stock in the consumer electronics retail space. The three-year chart dating back to October of 2002, illustrates how unforgiving the stock market can be when business is not good. Best Buy traded as low as $11.24/share at the temporary stock market bottom. After rallying as high as 41.48 at the heart of the Christmas shopping season in 2003, BBY traded in a range for 1-1/2 years, before gapping up and out of the range and reaching its target of about 10 points above its range or “box.”
Best Buy is now back in its “box,” and if it doesn’t break back above it soon, BBY will likely see 30. If it breaks below 29, BBY will likely visit its 2002 levels near 20. Autozone (AZO) is a likely candidate for Poster Child of the 2-year trading range stock market. As you can see from the 3-year chart below, the stock has a propensity for Houdini action. It is a bear market escape artist. Every time it drops due to poor fundamental news, it rises from the dead. In spite of this, the stock has underperformed the S&P 500 over the last 3 years. Yet while the stock has had a series of disorderly and temporary bottoms, it has made three orderly attempts to break decisively above 100. The latest attempt occurred following a Smith Barney analyst upgrade that gapped the stock higher.
Since the Smith Barney upgrade, the stock has been down 22 days and up only 12, as it has dropped over 15% in a little over a month. Yet Wednesday’s candlestick pattern (a high volume hammer), makes one wonder if this stock has one more Houdini act left. It also makes one wonder why Wall Street analysts still have any credibility whatsoever.
So, have I made my case that it’s time to say “Hello” to the bear market in consumer stocks? May be I’m just referencing some isolated sectors and stocks with company specific problems. While this may be true, it may be more convincing to look at a more diversified blue chip stock that is representative of the consumer sector. From motion pictures, to theme parks and resorts, to television and consumer products – practically every aspect of Disney’s business (DIS) is related to US consumer spending. The three-year chart of DIS below, shows that Disney’s relative strength (compared to the S&P 500) has broken into new low ground as of Wednesday. It may be different this time because for the first time since April of 2003, the 200-day moving average of DIS is sloped downward and the stock is well below its moving average. The action in Disney suggests that it may be time to say “Hello” to the bear market in consumer stocks.
While it may be time to say “Hello” to the bear market in consumer stocks, one can not rule out the potential that sometime soon, it may be time to say that I was wrong. What may indicate that saying hello to the bear market may have been premature? I would suggest that this may show on the chart of blue chip consumer stock, Time Warner Inc. (TWX). TWX is working on its third attempt of breaking above 20 and is showing excellent relative strength in the face of a tough market in consumer stocks. If a decisive break above 20 were to occur, it may be time to say what we have seen in consumer stocks was just a “healthy correction.”
It is likely that the US homebuilders have finally seen a top. While it appeared that way before, what is different this time around? What is different this time is that the Toll Brothers, the Cisco of homebuilders, has decisively broken down in a manner that has not happened before. This can be seen clearly from the point and figure (PAF) chart of Toll Brothers. For those not familiar with PAF charting, I would highly recommend Point and Figure Charting: the Essential Application for Forecasting and Tracking Market Prices, 2nd Edition, by Thomas Dorsey. The subjective method of charting using PAF provides the analyst with an unbiased chart which tends to be easier to view in a nonbiased manner. As you can see from the chart below, TOL has completed a quadruple bottom. Within that pattern was descending triple bottom breakdown which was completed on Monday. Although PAF “sell” signals have occurred during the long runup of Toll Brothers only to be negated by subsequent “buy” signals, the current patterns are clearly the most bearish that have occurred thus far. Since Toll Brothers was arguably the leader of the homebuilder runup, it is ominous when the leader produces such a bearish chart. While a bounce may be overdue for Toll (but in no way guaranteed), the trend is now down.
American Nobility Will Likely Impact Consumer Spending There is a factor likely to impact US consumer stocks which I feel is important, yet, has not been mentioned broadly. While one of our weaknesses is our tendency to spend excessive amounts of money on material goods for ourselves, one of our biggest strengths is our generosity. With the holiday season a few short weeks away, there is a collision course between our strength and our weakness. Our noble generosity toward those impacted by Hurricane Katrina will likely reduce holiday season consumer spending by a significant amount. Generosity is the American way, yet one cannot ignore that this will impact upon the short term fundamentals of many US consumer stocks. Particularly vulnerable are restaurant stocks, apparel retailers and those involved with appliances such as the George Forman grill. Today’s Market The major indices finished little changed today on volume that was very high as the NYSE traded over 2.4 billion shares. Nasdaq volume was comparatively low at 1.8 billion. Notable in today’s action was the Retailer Holders ETF (RTH), which was up over 2%. Notable consumer stock “ups” of over 2% included Autozone (up over 3% on an analyst upgrade – no surprise there), J.C. Penney, Nordstrom, Best Buy, Aeropostale and a host of other broken down retail stocks. In addition, several homebuilders were up today following an analyst upgrade yesterday and good news from KB Homes. Considering today’s action was it premature to “declare” that it is time to say “Hello” to the bear market in consumer stocks? Is now the time to simply short these stocks with the knowledge that the fundamental picture on our side and the charts have broken down? I would say that whatever your opinion, the principles of technical analysis should always be applied. That means always use a logical entry point and go into a position with a pre-devised exit strategy if/when the market has proven you to be wrong. Know the risk and the potential reward. Although they are showing technical weakness, the consumer stocks are still in an environment of overall bullishness in the general stock market. Similar circumstances occurred last spring in a sector that appeared to be ready to crumble from both a technical and fundamental perspective - the US auto parts sector. In addition to having broken down technical charts, these stocks were facing a plethora of negative business fundamentals. In spite of the fact that there was not one piece of fundamental news to support a meaningful rally, such a rally occurred. Those short sellers who chased the drops in these technically broken companies were faced with liquidating their positions in the face of a sharp and meaningful rally. Was there a basis for such a meaningful rally? In retrospect, potential and actual bankruptcies and the corresponding action in auto stocks have proven that there was no basis whatsoever for the spring rally. My point is that in today’s optimistic and speculative stock market, a reason for a rally is not needed. You must be careful out there! The following chart is a long-term monthly line chart of the gold spot price with the 6-month moving average shown. An inspection of the monthly chart which tends to smooth the daily and weekly fluctuations shows that the action from the first quarter of 2001 through 2004 may have been a big “first wave” up. This may suggest that the recent uptrend in gold is the third wave following a relatively short and shallow Wave 2 correction from late 2004 to the present. If the breakout decisively above $450 is in fact the start of a third wave (2nd impulse wave) up, then the extent of that wave may be at least as large as the first wave, since 3rd waves are never the shortest of the three impulse waves (1, 3, and 5). It also follows that as a 3rd wave, corrections against the major (up) tend to be shallow and short lived. The third wave is also the one where “the crowd” is right. The recent action in the gold market tends to support the beginning of a Wave 3. I’m far from an Elliot expert, but the behavior is supporting this “case” so far. I’m hearing a lot of “news” about the price of gold. Corrections such as perhaps the one today, have been short lived and shallow.
Bonds are rallying again, probably on the news that another large hurricane is heading our way. Would it be too cynical to suggest that the market is not considering the potential devastation and suffering that the hurricane would bring as much as the possibility that such devastation would provide the Fed with the motivation to pause in their measured pace of short term interest rate hikes?
Have a great evening. Martin Goldberg
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