Did Black Friday Mark the High for Retail?

by: Jim Farrish

The retail sector has enjoyed a solid run off the August lows. The S&P 500 index gained 14.1% since the August low and XRT, the SPDR S&P Retail Index ETF, has moved 30.4%. The leadership from the sector has played a key role in the move of the broader index.

The sales data for the biggest shopping day of the year, ‘Black Friday’, was up 6.4% over 2009. However, the sector opened down 2.1% yesterday in response. Does this signal the top for the sector? It is too early to tell, but there were plenty of reports yesterday sounding a lot like buy on the rumor, and sell on the news.

The chart below ((NYSEARCA:XRT)) shows the uptrend in play off the August low. The Relative Strength at the bottom of the chart indicates strong interest in the sector from investors as it has remained above the the midpoint with periods of consolidation and then acceleration higher. Technically, the chart remains bullish with the 50 day moving average as a guide to the upside.

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The discount retailers were not the main attraction this year for shoppers. They returned to the malls as toys and jewelery were the biggest sellers over the weekend. The department stores KSS, JCP, M, etc. were the leaders in sales this year versus the discount retailers, WMT, DG, DLTR, etc. Yet, Wal-Mart reported traffic was up 30% this year versus last. The question for all the retail stores is, did it translate into more sales, and in turn, more profit? Don’t count the discount retailers out. Family Dollar Stores (NYSE:FDO) continues in a solid uptrend and is at a new high.

Online retailers were looking for ‘Cyber Monday’ to provide a boost to their bottom line. Amazon (NASDAQ:AMZN) was up 1.3% yesterday in anticipation of a positive result. The sales started earlier this year for online retailers hoping for an increase over 2009 numbers. Scanning the internet stocks showed some interesting moves as Overstock.com (NASDAQ:OSTK) jumped 8% in anticipation of good sales numbers. Other benefactors included Netflix (NASDAQ:NFLX), Apple (NASDAQ:AAPL) and Priceline (NASDAQ:PCLN). Anticipation remains high among the online retailers.

Digging into XRT for a look at the individual stocks, we do find some divergence in rising stock prices versus relative strength. As an example, the chart below of Macy’s shows that the strong uptrend remains in play, but since mid October the relative strength has been declining. This is a warning sign more than a sell signal for investors who view technical data. Take time to scan through all the retail stocks for more opportunities. SSI, WAG, FL, ANF, URBN, PSUN and DKS are a few of interest for a continuation of the move higher.

If the news is so positive, then why all the gloom? More speculation than reality is the cause - big surprise. Retailers decided to not wait this year to promote sales. They started right out of the box, so to speak, to put items on sale and get the shoppers in earlier this year. After two dismal years of sales they didn’t want to take any chances on waiting. It worked, but at what cost? When you have sales you compress margins and thus, profits. That is the reason for the worry and speculation; sales are good, but are profits up? Only time will tell.

Disclosure: No positions