Tuesday, April 27, 2010

The 1 Chart That Explains The Entire Stock Market Rally

Many a market participant has been wondering what is causing this relentless drive higher in the stock market. As I have pointed out in the past couple of days, there has been a lot of pontificating on trying to explain the unexplainable. This price move could not have been predicted at the March, 2009 lows, and anyone who tries to tell you that they had it right from the beginning because this indicator said so, then I have a piece of land to sell you in sunny Florida.

But wait, I have found the one chart that explains what this historic rally has been all about. It may not have predicted the rally, but it does explain the rally. See figure 1 a weekly chart of the SPDR S&P Retail ETF (symbol: XRT).

Figure 1. XRT/ weekly

Yesterday, XRT eclipsed its 2007 high by several cents. Let me state that again in case it didn't sink in the first time. Yesterday, XRT eclipsed its 2007 high by several cents.

All you need to know about this rally is contained in this one chart. And with the XRT back at its bull market highs, the only explanation I can find for this is speculation. Speculation that the consumer is back. Speculation that our consumption based economy is back. Speculation that our housing problems never existed and don't exist in the future. Speculation that a 10% unemployment rate doesn't matter. Speculation that all is going to right again.

The retail sector is back at its 2007 highs. Wow! It is all good, again.

Are things really as good as 2007? Or maybe, we are headed back to 2007 and the market - being the all seeing and all knowing beast that it is -is just telling us that (cough, cough, wheeze).

But somehow, I am not buying it. And I doubt you are too.

One drive through the major retail section of our town, which is in the top 20 metropolitan areas by population, is enough to tell me that there is no boom. The only boom has been the number of businesses that have gone under. I am sure it is no different in your town. We like to say that we have a new business in town called "Space for Lease", and judging by the increasing number of signs in store fronts that say "Space for Lease", we can only assume that it must be a really "hot" business. And I am sure this really "hot" business has been franchised to your town too.

And with an 11% statewide unemployment rate and gas prices hovering around $3 a gallon, I cannot see things getting better anytime soon. But better they must get because this is what the stock market and XRT is telling us.

Technically, the breakout that we had highlighted several months ago in our article entitle, "The Bullish Case For Equities", has catapulted prices back to the 2007 highs. If there ever was a definition of a double top, this looks like it. It would seem unlikely that price has enough momentum to thoroughly and convincingly bust through.

The rally has been driven by speculation. There is nothing wrong with that. With the retail sector back to its 2007 highs, the speculation must be the hope that everything will turn out ok. Common sense would dictate otherwise.


D-man said...

These masters of universe are out of ideas (they can't find another sector for now to inflate and have a theory for XRT - because banks leave people to leave in houses for free so that they avoid foreclosures but also squatting, this "beast which anticipates things" says that those money will go in spending).

Just awesome! Jesus Christ...

Anonymous said...

Traders are always fighting the last war. There are markets in which traders outperform and markets in which buy and hold outperforms. Since the bottom over a year ago, clearly buy-and-hold has been the winning strategy. There will be a time when trading strategies will outperform again, probably just when everyone gets comfortable with buy and hold.

Guy M. Lerner said...

Both good points....

hettygreen said...

Dim as they might appear to most people, I like the prospects of sell and hold myself.

lawrence said...

I am from London, so a few questions. does XRT contain global retailers? if there are lots of retail outlets shut down, these no longer figure in the XRT and therefore any rebound n demand is going to be concentrated in remaining retailers. does XRT capture the growing middle class in India and China? 300million new middle Class consumers in India alone.

Anonymous said...

The sectors XLP and XLY also look close to or above 2007 highs. A bit hard to tell on stockcharts

Anonymous said...

Let me offer a further thesis: the centres of finance are NY and London. There has been NO RECESSION in either of these two places! The Masters of the Universe, having correctly assumed that the world was not coming to an end, have bought and bought and bought. The retail punters, far from Wall Street and the City, see only misery around them. But they are not buying equities, according to the figures. It's the hedgies. When the smoke clears, I bet we'll find that all the money has been made by the aggressive traders in the financial capitals.

D-man said...


"The retail punters, far from Wall Street and the City, see only misery around them."

Pls. stop with these kind of "you are dumb", I see it thrown at me all the time. Am I really the dumbest person on planet???


I was thinking at your post yesterday on XRT reflecting the big speculation out there; 'til yesterday, were you thinking that there was something else behind the rally other than speculation???

GreenAB said...

i agree with you that the rallye is in part built on speculation and zero interest rates while kicking many problems down the road. but i don´t agree on your assessment of XRT.

first: you have to consider the structure on consumption in the us. the top 20 earners are responsible for 2/3rds of consumer spending.
many of those high paying jobs on wall street have been saved. biotech and technology are boooming.

i cannot stress enough the second point: corporate leaders have been GREAT in reacting to the crisis.
which means closing unprofitable stores, laying off workers, CUTTING COSTS. the post lehman collapse in commodity prices has helped as well to drive their margins.

so all it needed to get profits back on track was a stop of the decline in consumer spending, followed by an average rebound.

that has been accomplished when (thanks to record stimulus) unemployment stopped rising.

SHOPPING (=self gratification) is deeply anchored in us consumers minds.
it might take a second depression to change that.

last, please have a look at XRTs holdings too: https://www.spdrs.com/product/fund.seam?ticker=xrt

those companies really did perform over hte last quarters.

D-man said...

GreenAB, are those 20% high paying jobs consuming more than before 2007 to compensate for the extra 5% unemployed between now and then? (not to speak about the U6 measure). I understand there is the saying "markets anticipate", but don't you think is a bit overpriced? Do retailers have pricing power to make up for the margins? I mean ok for a rally, but we're talking here "prices took out the 2007 highs!". Look, we can bring arguments for the positives; it is always the same story, not being reasonable. Well, let's be stupid one more time and see how it will work; hey, who knows? it might work! I see analysts upgrading their targets for companies with forward PEs like 60$; if there are some people who believe jumping from the 60th floor is safe, it doesn't mean jumping from the 40th is more safe...

GreenAB said...


"GreenAB, are those 20% high paying jobs consuming more than before 2007 to compensate for the extra 5% unemployed between now and then?"

of course they don´t and retail sales as a whole still are way below the 2007 high.

but in the end that doesn´t matter as long as they can squeeze a hell lot of productivity out of their workforce, lower their input cost basis and thereby increase their margins.

like i wrote before - look at the XRT holdings. the business of the largest position - NFLX - is undoubtely booming.

again - i´m not here to defend the rally that is partly based on money printing or silly valuations like the one´s of LULU.

but just comparing the unemployment rate plus the overall level of retail sales to the price of XRT makes no sense.

and i have to give credit where credit is due.
corporate america did a great job adjusting to the new level of economic activity.

as far as activity goes - there are many real time tracking sources like Redbook, ICSC, Gallup that show a persistent upward trend in consumer spending.