Why I Still Like the Retail Stocks

retail stocksA few months back, I turned bullish on U.S. retail stocks.

Specifically, on these pages, back on February 22, 2010, I said, “The chart of the Dow Jones U.S. Retail Stock Index looks well positioned to break above its 2007 high.” The DJ Retail Stock Index was then sitting at 325. Today, the DJ Retail Stock Index sits at 380, a gain of 17% in nine months.

To break through its all-time 2007 high, the DJ Retail Stock Index would have to rise another 6.5%. I think it’s going to happen, and here’s why:

Sales this Holiday Season are well above previous analysts forecasts. I count 21 major American retailers that have posted what I call “solid” Black Friday sales. And positive results keep coming from retailers. Just this morning, Canadian-based Lululemon Athletica Inc. (TSX/LLL), which has stores in the U.S., announced that its net profit for its third quarter jumped 103%.

This will likely be the best season for retailers since the Holiday Season of 2007. While most retail investors feel that consumers are holding back on spending, especially in light of millions of unemployed Americans, the fact is that the malls are full. I routinely visit retail stores in various major American cities, speaking to retail people about store traffic and sales. I can tell you that the stronger and more higher-end the brand, the stronger the sales this year Holiday Season. Even the stores in Vegas are busy!

Finally, we must remember that the stock market is a leading indicator. When the DJ Retail Stock Index topped out in May of 2007, it foresaw the recession we would experience in late 2007 and in 2008.

With the DJ Retail Index rallying for the major part of 2009 and for 2010, the index sees stronger retail sales ahead. Similarly, the DJ Home Construction Index is still down 69% from its 2007 high and staying down—it obviously does not foresee an improvement in the housing market anytime soon.

Historically, the Dow Jones sub indices have been leading sector indicators for me. And, right now, I like what the DJ Retail Index is telling me about the future of retail stocks.

Michael’s Personal Notes:

Poor President Obama, the man just can’t get a break. He walked right into the worse economic upheaval since the Great Depression, actually saved us from another depression, and all he gets is criticism. A poll released this morning by Bloomberg National Polls says that most Americans feel they are worse off under President Obama.

Sure, as a taxpayer I wasn’t too happy about my tax dollars going to save General Motors Company. But GM (NYSE/GM) later went public and paid back a chunk of money to the government. Washington will likely see all its money invested in GM returned. Yesterday, AIG announced that it will use the proceeds from the sales of two insurance companies to repay a line of credit to the Federal Reserve. The government is also selling its stake in Citigroup.

So it was a very difficult ride. The government made some difficult decisions. For one, I still feel Washington should have helped Lehman Brothers. I’m also terrified about our record deficits. We are not out of the woods yet, especially at the state level; but, in the end, we are pulling out of the worse recession of our generation. Obama needs at least some credit for that.

Where the Market Stands; Where it is Headed:

Will today be the big day? The day the Dow Jones Industrial Average breaks to a new 52-week high? Could be. Stock market futures are strong this morning. A report just released says the number of U.S. workers filing for unemployment benefits (jobless claims) fell 17,000 last week to 421,000 (U.S. Labor Department statistic).

Nothing has changed much about my opinion on the stock market. I believe that a bear market rally in stocks started on March 9, 2009, and that rally continues.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.