A Massive Bubble In Retail Stocks

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by Dave Kranzler, Investment Research Dynamics:

Retail, especially the “concept” retailers, are going parabolic. It makes no sense given the declining rate of personal consumption, retail sales, etc. The kinkiest names like RH, RL and W are going up like the dot.com stocks went up in late 1999/early 2000. The move in these stocks reflects either mindless optimism or momentum-rampaging by hedge fund bots – or both. The hedge fund trading flow can turn on a dime and go the other way. I suspect this will happen and, as it does, squeeze even more mindless optimism out of the market.

The cost of gasoline has to be hammering disposable income for most households. On top of this is the rising cost of monthly debt service for the average household. Non-essential consumerism is dying on a vine.

Fundamentally the retail sector is not recovering. If anything, the economic variables which support retail sales are deteriorating. I think some of the shares caught a bid on better than expected earnings derived from the one-time bump in GAAP non-cash income from the tax law changes reported by numerous companies in Q1. I just don’t see how it’s possible, given the negative wage, consumption, credit and retail sales reports that the sector has “recovered.”

In just the last eight trading days, XRT has outperformed both the Dow and S&P 500 by a significant margin. It has all indications of a blow-off top in process. You can see that, with industry fundamentals deteriorating, XRT’s current level now exceeds the top it hit at the end of January, which is when the stock market drop began. The RSI has run back into “overbought” status.

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