11/04/15   Retail Season

Editor’s Corner

Ron Rowland

I do not know how many more shopping days there are until Christmas, and I’m not going to make the effort to find out right now. We’ll all know soon enough. Yes, Halloween and October are behind us, and the holiday season is now underway.

From an investment perspective, this means that retailing stocks will become the focus for many market analysts and financial news outlets. Perhaps it has already begun. I’m a big believer in trends, and I have no reason to doubt that the major long-term trend of holiday purchasing habits will not change this year. The trend I’m referring to is the shift from brick-and-mortar stores to online shopping sites.

Amazon (AMZN), the nation’s largest online retailer, announced third-quarter earnings a couple of weeks ago that exceeded consensus estimates. With the holiday shopping quarter now getting underway, does anyone really doubt that its fourth-quarter revenue will exceed that of a year ago? Meanwhile, Amazon stock has been performing flawlessly, more than doubling in price since January.

Retailers are part of the Consumer Discretionary sector, and so far, 48 of the 84 (57%) S&P 500 companies in the sector have reported third-quarter earnings. Of those reporting, 69% have exceeded their consensus earnings estimates according to Thomson Reuters. However, only 40% have exceeded revenue estimates, suggesting that firms in this sector have been successful at squeezing more profits out of every dollar received.

Investors wanting to play the retailing industry this season have a number of ETFs to choose from. The SPDR S&P Retail ETF (XRT) takes an equal-weighted approach to holding 102 US-listed retailers, giving it a 14.8% exposure to the Internet retail segment. Market Vectors Retail (RTH) employs a traditional capitalization-weighted approach to owning the 25 largest retailers. The fund doesn’t report its exposure to online retailers, but Amazon (AMZN) is its largest holding at 14.4%. PowerShares Dynamic Retail (PMR) uses a smart-beta approach that claims to choose and weight its 30 holdings based on multiple factors (price momentum, earnings momentum, quality, management action, and value). However, Amazon is not currently in its portfolio, which makes me scratch my head about whether the fund has correctly applied the “smart-beta” terminology.

As you have probably surmised, the traditional cap-weighted approach of RTH is currently working the best in this environment. Aggressive traders may want to consider the Direxion Daily Retail Bull 3X Shares (RETL), which follows a cap-weighted index with a 300% daily exposure. Just remember that leverage can work against you. Back in August, this ETF plunged 25.9% in just four days.

Investor Heat Map:11/4/15

Sectors

Technology is on top for a second week, and Health Care sits in the basement for a fifth week. Everything else has changed. While the two extremes held their ground, the nine sectors in the middle were tossed around. Consumer Discretionary climbed four places to second, Telecom edged two places higher, and Energy made a six-position leap to land in fourth. On the downside, Real Estate fell two spots to fifth, Consumer Staples plunged from second to eighth, and Utilities dropped six places to tenth. This appears to represent a new aggressive posture for the market, with cyclical sectors rising and defensive sectors falling. Energy and Health Care were both in the red a week ago, but today all eleven sectors are now in the green.

Styles

The style rankings are aligned in their defensive pattern. For style-boxes, taking on a defensive posture means the blue-chip stocks of the Unlike the sector rankings that dramatically changed over the past week, all eleven style categories are in the same rank order today as they were a week ago. Although the order remains the same, the complexion changed substantially as the five bottom categories moved from red to green. The 40-point spread in the momentum scores between the two extremes noted last week has now shrunk to 28 points, although it is still significant. All categories posted momentum improvements, but since the spread was reduced, it points to the lower-ranked categories as showing the best gains. Top-ranked Mega-Cap added eight points to its momentum score, while last-place Small-Cap Growth boosted its score by 20 points. In contrast to the aggressive stance forming in the sector rankings, the style rankings remain in a defensive lineup.

Global

Nine of the eleven global categories changed their relative ranking this week. Only Canada and Latin America, the two on the bottom, are in the same position as last week. The US climbed two spots to take over the lead, and World Equity followed along. Their ascent pushed China from first to third and Japan from second to fourth. Eurozone, EAFE, and the UK all climbed a notch as Emerging Markets slipped lower. While all of the sector and style categories have now moved to green, the number of global categories in the red actually increased this week. Pacific ex-Japan fell three places to ninth and flipped back into the red. As mentioned previously, Canada and Latin America remain at the bottom.


Note:
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

 


“How smart is a smart-beta retailing ETF that doesn’t own Amazon?”

–Ron Rowland


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