Retail Sales, The State of the Economy and the U.S Dollar's Recent Rally

Includes: BBY, BND, KSS, TGT, UDN, UUP
by: Wyatt Investment Research

Retail sales for November rose more than expected. The 4th quarter is already shaping up to be the strongest for consumer spending since before the recession. And the National Retail Federation has upped its forecast for holiday sales.

Retailers are rallying on the news. But I will confess some disappointment at the group for its recent performance. Target (NYSE:[[TGT]]) has done well, but my top play, Kohl's (NYSE: [[KSS]]) has performed poorly since it rallied during the last two weeks of November.

However, Kohl's hit it's 50-day moving average Monday so there could be a trade-able bounce.

*****I've never discussed Best Buy (NYSE:[[BBY]]) but it's was getting killed yesterday after a poor earnings report and a comment that it doesn't have much visibility as to how customers will be spending over the next couple of weeks.

That's a pretty shocking statement for a retailer, at Christmas.

Inventories have also risen far faster than sales at Best Buy. That suggests the company hasn't gotten pricing right. Last minute shopping tip: You might find some deals at Best Buy between now and Christmas.

*****It's clear consumers are feeling better about the economy. We (I readily include myself in that group) tend to speak with our wallets. And it's not just consumers that are getting more optimistic. Corporate CEOs are forecasting increased plans for hiring in 2011.

*****The FOMC concluded another meeting yesterday. There Fed passed on new new information in its statement.

*****We discussed the US Dollar Index Monday. And it's interesting to note the relative strength of the dollar, and the continued rise in Treasury yields. As we know, the Fed wanted to keep rates low. But the plan is backfiring, in a way, as investors are interpreting the Fed's actions as a top for bond prices and have been selling consistently.

That's bad for bonds. PIMCO's $250 billion Total Return Bond Fund is down 3% over the last month. And when you consider that according to Bloomberg, bond funds attracted an average of $27 billion per month during the first 10 months of this year, it seems likely that investors have a lot of re-allocating to do.

We should expect strong moves for companies that pay solid dividends as these stocks attract bond money.

*****Finally, I'm going to leave you with some comments from my Wyatt Investment Research colleague Jason Cimpl. Jason is the trading strategist for TradeMaster Daily Stock Alerts and he follows the dollar closely, so the dollar's action, inasmuch as it is supportive of stock prices, is always in Jason's thoughts, (and in his pre-market comments to his subscribers).

From yesterday's letter to TradeMaster Daily Stock Alerts subscribers:

Considering the collapse of the dollar on Monday, the modest gains from the market were unsatisfactory. Additionally, and more importantly, commodities trended lower from the open. Instead of trending lower, all commodities should have extended gains amid the dollars demise.

The dollar is down again today, which should provide a floor of support for the indices. But we have to be aware that the recent selling would be a whole lot worse if the dollar strengthens.

The dollar may fall apart, and my worries will go away. But I need to consider how a 2% rally in the dollar would impact the market and our positions. Until the dollar index takes out $76 support there is an even chance it rallies past $81 and takes the market and most commodities down in the process.

At this point, it is quite early to draw any conclusions about the odd activity. Should this behavior persist over the next week, I may begin to rethink our bullish short-term outlook.

As indicated throughout the past month, and as recent as yesterday, I believe the recent rally could turn cold any day - but we are to stay bullish until it does turn. We have increased stop losses on most positions just like we did in April/May to avoid a massive sell-off.