Weaker-than-expected Consumer Confidence data from the Conference Board dampened some of the enthusiasm in the stock market on Tuesday. The sharp increase in the confidence of institutional investors as reported by the State Street Investor Confidence Index was pretty much ignored.
It was definitely a market that confounded the experts as out-of-favor retailers like J.C. Penney (JCP) and Dillard's (DDS) were both up over 7% on the day. Of course, JCP reports its earnings after the close today and DDS was down over 6% on Monday after it missed on both earnings and revenues. Another negative for Dillard's (DDS) was the large year-over-year increase in their inventories.
These retailers are part of DJ Retailers Index (DJUSRT), which dropped 9.3% from the late-December highs to the early February. Despite its recent rebound, it is still 2.4% below its highs. Macy's (M) was another retailer that reported earnings on Tuesday, and while earnings beat expectations, sales were lower. January was a particularly rough month, which management attributed to the extreme weather, which closed 244 of it stores.
Investors decided the glass was half-full as Macy's (M) shares closed up over 6% on the day and made a new all-time high. This illustrates the high level of volatility that has been evident in 2014 but what do the charts say about this sector as some of the consumer services stocks such as Target (TGT), Abercrombie & Fitch Co. (ANF), Lowe's Companies (LOW), and TJX Companies (TJX) are set to report earnings today?
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Chart Analysis: With just three days left in the month, it seems likely that the DJ Retailers Index (DJUSRT) will close higher in February and the monthly chart sill looks positive.
- The support going back to the June lows, line a, was briefly broken in early February.
- There is more important support for the index now in the 570-590 area.
- The bullish monthly chart shows long-term support, line b, in the 545 area.
- Once above the December high at 663, the monthly starc+ band is at 702.
- The monthly relative performance did confirm the monthly highs and has turned up from support (line c) that goes back to the 2007 lows.
- Both the monthly and weekly RS lines are still below their WMAs.
- The monthly OBV has held above its uptrend (line d) and the strongly rising WMA.
- The weekly OBV (not shown) is still below its WMA so the OBV multiple time frame analysis is mixed.
Select SPDR Consumer Discretionary (XLY) was one of my favorite sector ETFs for 2013 but it was hit hard when the emerging markets tanked.
- The 8.7% correction bottomed at $61.11 (line e) on February 5.
- This was just below the quarterly S1 pivot support at 61.24 as I noted last month.
- On February 7, XLY closed back above its quarterly pivot at $63.87.
- XLY has rallied 7.8% from the lows but is still below the all-time highs at $66.85.
- The daily relative performance did form a short-term negative divergence at the highs, line g, and is still below this resistance.
- The RS line is trying to hold above the longer-term uptrend, line h.
- The daily OBV broke through support, line I, from early in 2013 on the correction.
- The OBV has moved above its WMA but is still well below the recent highs.
- The weekly OBV (not shown) is close to its previous highs and looks much stronger.
- There is first good support in the $64-$64.60 area, which includes both the 20-day and 20-week EMAs.
The Home Depot, Inc. (HD) reported earnings before the opening on Tuesday, and while it missed sales expectations, investors focused on the strong guidance as it closed up almost 4%.
- The daily chart shows that the close was well above the daily starc+ band and the quarterly pivot at $79.40.
- HD had closed below this pivot on Friday January 24 (point 1) and proceeded to drop 6.5% over the next eight days.
- The January 2nd high was $82.57 with the weekly starc+ band at $83.34.
- The downtrend in the daily relative performance (line c) from the June highs has now been broken.
- The daily RS line had broken support, line d, in early February.
- The weekly RS line (not shown) has also broken its downtrend.
- The daily on-balance volume (OBV) pulled back to its WMA on February 19 before rallying sharply.
- The resistance at line e has been overcome but the weekly OBV (not shown) is still below its WMA.
- The monthly pivot support for March is at $78.65 with additional support at $77.36.
Gap, Inc. (GPS) reports its earnings after the close on Thursday. The stock rallied 6% on February 7 as its January sales beat expectations.
- The weekly chart shows that it has now broken out of its weekly range (lines f and g).
- The high last August was $46.09 with the monthly projected pivot resistance for March at $48.34.
- The weekly relative performance has turned up from support at line i and moved above its WMA.
- The RS did confirm the highs last summer, line h.
- The weekly OBV did form a long-term divergence at last summer's highs.
- This resistance, line j, has now been overcome as the OBV moved above its WMA three weeks ago.
- The daily technical studies (not shown) both look strong.
- There is good support now in the $40.40 to $41.80 area.
What It Means: The retail stocks are used by many to gauge the health of the consumer, and the recent action suggests they are doing well. The wide swings in many of the key retail names have made it difficult to establish new positions especially around earnings reports.
The Home Depot, Inc. (HD) is a good example as buying before its earnings was only supported by the daily OBV, not the relative performance or the weekly analysis.
I have no recommendation for Gap, Inc. (GPS) ahead of its earnings but I will be looking for setbacks in some of the other retail stocks that have moved sharply higher. I will also be looking for a pullback in the SPDR S&P Retail (XRT).
I would look to get back into the Select SPDR Consumer Discretionary (XLY) on a pullback.
How to Profit: For Select SPDR Consumer Discretionary (XLY), go 50% long at $64.72 and 50% long at $63.88, with a stop at $60.69 (risk of approx. 5.6%).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.