Is the great retail bull market finally over?

Last week’s trading might be giving us the answer…

Since the broad market bottomed in 2009, retail stocks have been huge winners. They’ve defied skeptics by soaring. Some big-name retailers like Macy’s (M) and Foot Locker (FL) climbed more than 800% from their bottoms.

But last week may have marked the official end of the retail rally…

•  Last week was the worst week for U.S. retail stocks since May 2012…

The S&P 500 Retail Index fell 5.2%.

The SPDR S&P Retail ETF (XRT) also dropped to its lowest point since October 2014. XRT holds retailers like video game store GameStop (GME), department store Dillard’s (DDS), and supplement store GNC (GNC).

As you can see from XRT’s six-year chart, the selloff pushed the fund below its long-term trend line.

A long-term trend line shows the general direction a market, sector, or industry is heading. Many professional traders use it to separate normal market gyrations from something bigger.

Think of it as a “line in the sand.” When an ETF like XRT crosses the line, it often signals the end of the long-term trend.

As you can see, retail stocks have had a few “normal” selloffs since 2009. Then, they crashed with the rest of the market in late August. The broad selloff pushed retail stocks below their rising trend line for the first time in over six years. They’ve been falling ever since…

•  Last week’s selloff ended with several huge retail stocks collapsing…

Nordstrom (JWN) plummeted 15% on Friday. It was the stock’s worst day since 2000.

Nordstrom is one of the largest U.S. department stores. Last year, the company brought in $13.5 billion in revenue. Almost all of that revenue came from the United States.

Friday’s crash happened after the company reported poor third-quarter results on Thursday evening. Nordstrom’s fiscal third-quarter sales were $100 million lower than analysts expected. The company also reported earnings-per-share (EPS) of $0.42, or 42% lower than Wall Street expected.

Nordstrom now expects this year’s profits to be 14% lower than it originally projected.

Nordstrom’s lackluster performance tells investors a lot about the mood among U.S. consumers. Other large retailers are flashing similar signs…

•  Macy’s, the largest department store in the U.S., also plummeted last week…

Its stock collapsed 20% after reporting poor quarterly results on Wednesday. It’s now trading at its lowest level since February 2013.

The company’s sales for its third fiscal quarter were 5% lower than last year. Even worse, Macy’s reported a 41% drop in EPS. This was the third quarter in a row that both sales and profits declined.

Like Nordstrom, Macy’s warned that this year’s profits will likely be lower than it originally projected. The company now expects total sales for the fiscal year to fall by 1%. It previously expected sales to grow by 1%.

•  Watch and clothing maker Fossil (FOSL) also shared terrible quarterly results last week…

On Friday, the company reported a 14% decline in sales from the previous year. Its profits dropped 45%. Fossil’s stock crashed 37% on the news. It’s now at a 52-week low.

Plunging stock prices aren’t the only bad news coming out of retail. On Friday, the U.S. Commerce Department said retail sales rose just 0.1% during October. Economists expected sales to rise 0.3% last month.

•  U.S. consumers are starting to spend less right before the holiday shopping season…

E.B. Tucker, editor of The Casey Report, says last week’s selloff in retail stocks could mark the end of a six-year spending spree.

After the financial crisis, people bought new cars, new homes, and made more trips to the mall. Life was good. Today, people are spending less and less on things they don’t really need. That’s what happens when times get tight.

Consumers are cutting back spending on “want” items and that’s hitting certain retail stocks hard.

Fossil is one example. It sells watches, wallets, and all sorts of things people can do without. Two years ago, its stock traded for nearly $130 per share. It’s now a $30 stock.

Sporting goods store Hibbett Sports (HIBB) is another example. Like Fossil, Hibbett sells things the average person can do without. Less than two years ago, the company’s stock topped $67. It now trades for less than $30.

E.B. also says it’s only a matter of time before problems in the retail industry turn up elsewhere.

Consumers cut back spending on mostly unnecessary items first. Pretty soon, Americans are going to stop buying steak and start buying hamburger. When the economy sours, every penny counts.

Before you know it, people are pawning off all the expensive junk they bought with cheap credit since the last financial crisis. That’s one way markets unwind seven years of excess borrowing and spending.

Many investors will end up finding coal in their stocking before this holiday season is over.

Chart of the Day

The airline industry could be the next major U.S. industry to sell off…

Today’s chart shows the performance of the Dow Jones U.S. Airlines Index over the past four years. This index tracks the performance of major U.S. airline companies such as Delta Airlines (DAL), Southwest Airlines (LUV), and American Airlines (AAL).

The index has gained an impressive 370% since November 2011. That’s almost six times more than the 64% gain the S&P 500 has made over the same period.

Yet almost none of the airline industry’s impressive gain happened this year. The index is actually down 5% this year.

If U.S. consumers are cutting back on trips to the mall, there’s a strong chance they’ll also take fewer trips to Cancun and Disney World. That won’t bode well for airline companies.

Regards,

Justin Spittler
Delray Beach, Florida
November 16, 2015

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