Drill down below the surface and examine which sectors are and aren't performing, and you will see that US retail is flashing a massive sell signal.
While many commentators focus on the main indices, such as the FTSE 100 and S&P 500, I like to conduct an analysis of actual sectors to see which ones are strong and which ones are weak. Presently, I am not finding anything spectacular on the strong side, although one space, US retail, is showing real signs of weakness.
US consumers may still be spending, but they are now being far more careful, and the idea that spending will return to anywhere near 2007 levels is just pure fantasy. Retail company shares have had a fantastic bounce since their March 2009 lows, with some, such as Gap (NYSE:GPS) and Bed Bath & Beyond (NYSE:BBBY) getting back to bull market highs before recently selling off.
The problem going forward, of course, is that consumers are tapped out, and credit and store credit are much harder to obtain, which is leading to lower sales. So even if consumers want to spend more, they can't. Also, given job uncertainty, they are saving cash and doing without non-essential items.
If you look at Costco Wholesale (NASDAQ:COST), the chart continues to look very weak. Margins are being squeezed and Costco is having to offer large discounts to entice consumers to buy. Contrast this with a few years ago, when you would have had traffic jams on a Saturday to get into most Costco car parks. The stock peaked in 2008 at $72, before crashing to $37 in 2009. It recently recovered to $60, before restarting a downward move to the current $55.
Costco, which operates 569 warehouses globally, is a well-run concern. However, since the majority of earnings come from the US, the business is just so sensitive to US non-farm payrolls, and I see the shares drifting down to $45 by the year-end.
Tiffany & Co (NYSE:TIF), while it has international exposure, still depends on US spending and the chart has turned negative again. Tiffany has some massive profit margins, but the group also has heavy fixed costs and is dependent on gifts and the holiday season.
Clothing company Phillips-Van Heusen (NYSE:PVH), the owner of the Calvin Klein and other premium brands, has just given a sell signal.
If retail is not doing well, then it is bad news for PVH. After all, do you really need to buy premium CK underwear when a perfectly good alternative can be found? In a similar field, Polo Ralph Lauren has had a great bounce-back of over 160 per cent from its March 2009 lows, but has seen more recent selling, with founder Ralph Lauren wisely using recent strength to sell over nine million shares at $78 a share.
Gap (NYSE:GPS) is also struggling, with many shoppers looking for cheaper alternatives such as the goods offered by Primark (owned by UK-listed Associated British Foods, LSE:ABF). Gap shares have recently broken the uptrend, and while they may hang around the $20 level, I see the next major move being a downward one, leaving GAP looking a good short candidate.
On the long side, 99c Only Stores (NYSE:NDN) continues in a steady uptrend as the deep-discount value stores hold up better, while Ross Stores (NASDAQ:ROST), whose tag line is ‘dress for less', is also doing well, with its shares not far off their 52-week high.
A stock that is not retail but does relate to price-conscious consumers is Del Monte Foods (NYSE:DLM), which I have written about in the past. Currently priced at $14, the group is a market leader in canned fruit and vegetables, and the pet food side of its business continues to do well. Trading on a p/e of 13 and paying a 2.4 per cent yield, Del Monte is a great defensive company in which to stash some cash.
