They're All Growth Companies!Two of the leading sectors in the stock market in terms of 6-month performance are retail clothing stores, and department stores, ranking 1st and 9th, respectively in Investor Business Daily’s (IBD) 197 industry group rankings. The stocks within these sectors are having bullish runs that resemble those of high growth innovative companies, yet these companies are involved in businesses within markets whose long term growth rates are known, modest, and predictable.
The government, the Fed and our Asian neighbors can turbo charge the generally gullible US consumer by allowing them to pile up debt via tax credits, perceived home equity, and artificially low interest rates to spend items purchased at retail stores. And there is now no telling how long the stock market will perceive the short term good fortune of retailers resulting from the credit bubble as “growth.” While these stocks by and large have the necessary component (momentum) to be winning stocks in the near term, there is a lot of risk in the intermediate and long term. Tonight, I’ll take a look at the technical charts of department store stocks. With one or two small exceptions, the near term outlook of these stocks (as long as the general stock market holds up) is “all good.” Yet while the near term prognosis of department store stocks is good, it is worth noting that the fundamental driving force behind their “growth” and stock performance is not sustainable and therefore, these stocks will eventually fall hard.
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Federated Department StoresFederated Department Stores is in the process of making its steepest bullish run since it advanced from about 25 to over 75. What are these panic buyers seeing that has not already been seen?
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Today’s MarketThe hot stocks stayed hot today as retailers and homebuilders led the general market higher. The Dow Jones US Homebuilders index closed at a new 52-week high and Pulte Homes broke out of a cup-with-handle pattern. The kid’s clothing retailers and department stores were strong on the back of generally strong June same store sales. Notable to the upside for kids cloths were Abercrombie and Fitch (+2.4%), American Eagle (+0.5%), Urban Outfitters (+0.4%), the Gap (+3.5%), and Limited Too (+1.5%). Laggards included Aeropostale Inc. which was down 6.5% in spite of two analyst upgrades in 2 consecutive days. The trading pattern in this stock is a tradable and (too) predictable trading range. After its run as a hot IPO, over the last year, the stock has traded in a 30% wide range, always making a slightly higher high and a slightly lower low.
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Today’s market showed tremendous resiliency in the face of the horrible and cowardly act of terrorism carried out in London, as the only major indices that were down were international, and the commodity-heavy Amex composite. Transports may have resumed their role as a laggard as they were down slightly in spite of lower closing oil prices (that were still above $60/barrel). The HUI was down slightly today, and it may be a bit overbought as it has failed to break its 40-week moving average for 4 consecutive weeks. My short-term view would change if the HUI closed above 210. The fundamental case for gold is as strong as the fundamental case for retailers at today’s valuations is weak. So when does a gain or a loss in the stock market become righteous?
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