Avoid Retail Sector

The DOW slid 184.13 points or 1.63% on Tuesday, its fourth triple digit loss since May 11 and the third biggest one-day loss this year. Markets are continuing to trade with a negative bias and I expect this to continue in the near-term until we see some buying support develop.

 Driving the DOW lower was disappointing news from retail bellwether and DOW component Wal-Mart Stores Inc. (NYSE/WMT). How Walt-Mart fares generally drives the retail sector. Wal-Mart reported a lackluster 2.3% year-over-year increase in its May same-store sales. The result was at the low end of the company’s previous forecast and clearly points to some fragility in the retail sector.

 The S&P Retail Index had been trending higher after its previous dip in February, but is again on a downward trend, which could see the index take out the February low and test support levels not seen since September and October 2005.

 The cracks that are showing in the retail sector are due to lower consumer confidence, higher gas prices, and rising financing rates. The Conference Board’s consumer confidence index slid to 103.2 in May–the lowest reading since February when the retailers also took a hit. The reality is the higher costs to finance big-ticket purchases such as cars, appliances, furniture, and home renovation is playing on the mind of consumers. Americans already have some of the highest debt loads in the world; as higher interest charges to carry debt mount, consumers will need to cut back on their discretionary spending in non-essential areas. In turn, this impacts retail sales, which we are again seeing.

 As an investor, I would not be a buyer of retail stocks at this time given the concerns towards spending. As I said in previous commentaries, I believe there are better areas to put your “investable” capital in and the retail sector is not one of them.