On May 2nd, I authored an article titled "Trading Environment Remains Robust As Poor Economic Data Proliferates". In the article I explained that the major averages were having a tough time breaking out and to all-time highs. Additionally, I offered my outlook over the next couple of weeks as follows:
My expectation would be to see the major averages pull back over the next two-week period based on the macro environment, U.S. economic data and the totality of the earnings picture thus far. All three of the aforementioned variables have been found wanting for greater performance, but the markets have largely shrugged off the weakness as discussed earlier. But fundamentals matter and it is only a matter of time before those fundamentals are taken into greater consideration and investors position accordingly.
The Dow Jones Industrial Average had been trading around 17,900 on May 2nd and now rests at 17,535 having pulled back for two consecutive weeks and almost 400 points. As such my directional indication was proven and investors have a better opportunity to consider strong company stocks that may have sold-off without greater causation other than a pullback in an otherwise over-extended marketplace.
Having said that, in reviewing the constant underwhelming economic data and latest consumer-centric spending trends, this downturn may still yet have legs. Last week a host of retailers missed both top and bottom line results. Some retailers like Macy's (NYSE:M) and Kohl's (NYSE:KSS) also lowered FY16 guidance. J.C. Penney (NYSE:JCP) reported results that beat on the bottom line but missed by over $100mm on the top line. In total, the retail sector was depreciated mightily last week. Even those big-box retailers like Target (NYSE:TGT) and Wal-Mart (NYSE:WMT), which will report this coming week, found their respective shares significantly depreciated on sentiment for all things brick and mortar retail related. The ways in which consumers are spending money and where they are spending money have shifted greatly toward e-commerce in recent years and as such a tipping point may be at hand for the brick and mortar chains. Even as they have invested heavily in e-commerce build out over the last 3-4 years, none of the department store and hypermarket chains have greater than a 4% sales accumulation of their respective total sales coming from e-commerce. They are still greatly dependent on their brick and mortar stores to drive results.
Moreover, while the April retail sales report seemed rather inspiring, it failed to delight investors on Friday as the Dow and S&P 500 both fell on the day and for the week. In March, retail sales fell sharply and by .3 percent, the largest drop since February 2015. But in April they rose sharply and by 1.3%, to much surprise. On a MOM basis, April's results were the largest jump in retail sales since 2010.
The problem with where the greatest increase MOM for retail sales is where it is coming from. Most of it was driven by gas, autos and Non store/e-commerce. The laggard as continues to be the case is coming from department store retail sales.
I'm not too pleased with the economic data and regardless of a singular outperforming month for retail sales, the profits from those sales are hard to come by. Consumers are spending on needs and experiences, not apparel and not to the degree they had been. And even the almighty Apple (NASDAQ:AAPL) is finding itself at odds with the consumer as the company announced its dismal Q1 2016 results. The company missed on all expectations and lowered FY16 guidance as the iPhone maker witnessed its first ever-quarterly decline in iPhone shipments. In short, the consumer in some fashion or another has hit every one and the economic data points to a continued subdued spending environment for the remainder of 2016. As such, many stocks tied to the consumer will be in the "show me" phase for much of the year and/or until something meaningfully changes on the consumer's part.
I'm expecting the market to continue to come under pressure over the next 30 days, but there might be a break in the weekly trend this week. After Target and Wal-Mart report their first quarter results there may be a brief, albeit uninspiring rally, that will ultimately result in a resumed downtrend for the markets. As there has been little rumbling on the global macro-outlook lately, this might be the catalyst for stocks next week, a lack of global panic. But as we all know, it takes very little to stir those global weakness fears and bringing with it a global market sell-off. "Brexit" anybody?
Moreover and more "Amero-centric" focused, it's hard to find that economic data point that shows the economy is growing at or above 2% YTD. Earnings will decline for a second consecutive quarter more than likely. While we are a consumption-based economy, our largest of consumption sectors of the economy that is retail, is finding the largest retailers struggling a great deal. And as those retailers continue to adapt to the "new" retail landscape, jobs are being shed and stores are being closed. The latest Nonfarm Payroll report was certainly an indicator of weakening retail and services. While many had expected 200,000 jobs to have been created for the month of April, the report showed that only 160,000 had been created.
And for all the aforementioned economic data and retail reporting recently and YTD, I decided for the first time in nearly 4 years to reduce my core short position in ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY). The UVXY has been bottoming for nearly a month and as the markets have become overbought. But even so, the contago effect has continued to pressure shares of UVXY as is to be expected. My greatest near-term concern regarding the overall markets and trend is that they continue to defy the underlying weakening fundamentals of the economy. This is not to suggest that I believe the economy is going into a "tailspin" or we are on the precipice of some financial market calamity. But nonetheless, there don't see to be an opposing force to propel markets higher in the near-term.
I've been able to beat the market consistently and by multiples since 2012 by holding a core position in shares of UVXY. With more than 3 years worth of profits booked and a potential for UVXY to move against its traditional downward trend in the next 30 days, I believe taking ¼ position off the table at this time was optimal. Not only am I reducing my exposure to the market, but also I'm enabling myself to explore the opportunity to reposition this quantity of shares higher should the opportunity present itself.
I alerted my actions for reducing my UVXY core short position last week via Twitter (NYSE:TWTR) as follows:
$UVXY I covered some of my core UVXY position today, first time in quite a long time. Trying to reduce exposure to being long the market.
While taking some of my UVXY short position down at $13.50 last week and finding shares trading slightly above that price presently, in no way am I taking a victory lap. As I stated within this article, there is a decent possibility this week could bring with it less volatility and an overall market that trends higher, but we shall see.
Optimally, I would like to see the S&P 500 break below 2,000 over the next 30 days and exhibit upward momentum in shares of UVXY. Should the opportunity present itself whereby shares of UVXY edge up against $20, I would look to begin putting capital to work again on the short side. Best-case scenario, if I may, would be for UVXY to accelerate up toward $24, $25 a share whereby I would look to increase my short position. Of course this type of activity would be taken with consideration to the macro environment and/or any major stresses on the global outlook.
Over the last 3+ years I have dedicated appropriate time and due diligence regarding the movement and construction of the UVXY as an investment vehicle. With the understanding the instrument was designed to depreciate over time and spike during times of great volatility, I spend little investing and/or trading capital elsewhere. As a trader I do like to trade and when evaluating or considering my trade ideas they should be more greatly considered with one's personal objectives and/or investment goals. Having outperformed the market significantly for the last 15 years and more recently with the benefit of UVXY, my current positioning reflects my net worth standing and personal risk tolerance. As such, I would offer that investors/traders might consider these variables as well.
Disclosure: I am/we are long TWTR, JCP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I maintain short positions in shares of UVXY at all times and over the last 3 years plus