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Published: October 26, 2009
The retailing rebound is real.
I realize it’s a little bizarre to see retailers performing
so well, but all the data that I see supports this move at the
most fundamental level. Analysts at ISI Group in New York have
done a weekly survey of retailers for two decades. They reported
last Monday that over the prior two weeks, their retailer survey
results have surged +15%. U.S. retailers are even doing better
than ISI’s surveys of Chinese sales.
They believe it’s likely that chain-store sales, after rising
+0.1% year-over-year in September, will rise by a much more than
expected +3% in October. And because chain-store sales plunged
month-over-month in November and December last year, they’re on
track to rise +6% year-over-year in December this year -- which
is way more than expected. Keep in mind that in September, they
were already up +5% from their December 2008 low.
ISI reports that there is a
correlation of 88% between holiday
sales and stock-market performance.
The S&P 500 is now up +4% from
September, which suggests that
holiday sales will advance at a 5%
quarter-over-quarter annualized
rate.
How can that happen with employment
trends so rotten? Well, maybe
they’re not so rotten. Data
continues to show improvement, with
temp employment company surveys,
manufacturing employment surveys and
the Empire State manufacturing
reports all moving higher in the
past three weeks.
As ISI points out, keep the
chronology in mind: At the worst of
the recent recession, there were
fears of a depression. So companies
cut employment more than the gross
domestic product (GDP) decline
suggested was necessary. If
conditions keep improving,
managements are likely to feel
compelled to lift hiring more than
normal. Employment is already
increasing in six major economies
outside the United States, including
Japan, Canada, Korea and Brazil.
Considering that declines have been
moderating by around 100,000 jobs
per month, ISI analysts say, figure
that jobs will decline by 163,000 in
October and 63,000 in November,
followed perhaps by 37,000 in
December and 137,000 in January.
This would further crush arguments
by the bears that the U.S.
stock-market advance is not
supported by fundamentals. If this
starts to come into view in a major
way in November, once the October
jobs figure is announced on Nov. 6,
we could be in for a very positive
November and December as
underinvested managers pour into the
market from the sidelines.
I know you’ve heard this from me for
months, but now we’re coming to
show time. If it’s going to
happen, it’s going to happen soon.
There’s probably one more semi-scary
decline ahead to shake out the weak
hands before the next phase begins.
I’m not saying it’s right for this
to occur. And I’m not saying I agree
with it. But I am saying that it
could happen.
And because the public thinks it’s
impossible, it really has a strong
potential to occur.
Tears for Fears
In summary, let me quote from
Paul Desmond over at Lowry’s
Reports, who’s been around a few
bear and bull cycles in his time.
Here’s what he told his
institutional crowd late last week
as they headed into the weekend:
"The media is filled these days with
‘expert’ opinions on a plethora of
potential problems such as
inflation, deflation, excessive
debt, over-valuations, and a weak
economy, to name just a few, that
will ‘undoubtedly’ bring the stock
market to its knees any day now.
These cumulative opinions comprise
the current version of the Wall of
Worry that the stock market has
perpetually climbed during the early
stages of every extended market
advance since the stock market was
formed under the Buttonwood Tree.
Each new major market advance has
had its own list of worries which
served to keep many investors on the
sidelines fretting about problems
that rarely materialized.”
As Desmond points out, bull-market
cycles don’t end on bad news. They
end after very long stretches of
good news that make people forget
their worries. Up cycle finishes are
marked with a four- to six-month
divergence between a top in the
advance/decline line and the major
indexes. That is, the A/D line has
typically been declining half a year
before a final top in the major
market indexes is made. At present,
the A/D line just made a new high a
few days ago. So a top is likely at
least four to six months away.
We can’t know exactly how long the
current advance will last, but just
keep in mind it will almost
certainly not end when everyone is
still freaked out about
unemployment, earnings and banks.
The end will come amid sunny skies
and smiles.
To participate in the advance in the
simplest way, you only need to own
an exchange-traded fund that covers
the world’s stock markets, such as
Vanguard Total World (NYSE: VT).
Ideally, try to buy around $41.50.
Set a $37.50 stop just in case my
thesis is wrong.
Conclusion: From a
positioning standpoint, this is no
time to go out and get all
contrarian. When the next upswing
begins, stick with materials, tech,
large caps and emerging markets.
-- John D. Markman
Contributing Writer
Money
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