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Why the Santa Claus Rally Ain’t Coming to Town

Briton Ryle by Briton Ryle
December 2, 2022
in Analysis
0
Santa Claus wearing sunglasses smoking a cigar and drinking whisk on dark background

The holiday season is finally here. Thanksgiving is now in the rear-view mirror, and the 4-week sprint to Christmas is ahead. 

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I’m already working out the details of getting my kids to southern Georgia from College Park, Maryland, and New Orleans (my daughter gets home from Europe on the 16th). I’ve even started a rough draft menu for their visit. 

And I must say the distraction from inflation, recession, and politics is a relief. With all the fear-mongering about the trajectory of inflation we are constantly subjected to on the evening news, it’s easy to see how an economic recession can become a self-fulfilling prophecy.

I love you, Lester Holt, but sheesh, give it a rest. 

Of course, the financial media isn’t going to give it a rest. Every anecdotal data point about spending this Christmas season will be framed by the “health of the consumer” backdrop. 

Like the “consumers step up: $9.2 billion record for online spending on Black Friday” headline. Oh, big number, must be good, right? 

Well, it’s not bad, exactly.

But the thing is, e-commerce has its own momentum. Every retailer is pushing online sales. It shouldn’t be a surprise that people avoid driving, parking, and standing in lines and opt to click a few buttons on their phones. 

Frankly, I’d be surprised if online spending failed to hit a new high watermark this year and every year for the next decade. 

Still, e-commerce isn’t the best barometer for retail sales. Online sales still only account for 14%-15% of all retail sales. Not a drop in the bucket, but it also doesn’t give us anything resembling a complete picture.

Hitting the Target 

I hate to bring up bad news at this cheery time, but let’s turn the clock back a few weeks to Target’s (NYSE: TGT) third-quarter earnings report. Target said it ended Q3 with $17 billion worth of inventory – equivalent to 65% of the sales revenue it managed for that quarter. In other words, Target comes into the all-important 4th quarter with the most inventory it’s had in 4 years. 

Plus, Target expects total sales to be “low single-digits” and operating profit margins around 3%. 

The plan for Target seems pretty clear: everything must go. Target has almost no choice but to discount its inventory to whatever level just to get it out the door. That’s why it started “Black Friday” deals back in October. And it’s why Target’s profit margin forecast should be considered just a guess. 

Now, it’s true, Target’s third-quarter earnings report was by far the worst of the big retailers. Walmart (NYSE: WMT) and even Macy’s (NYSE: M) were much, much better. 

Still, the fact that Black Friday discounting for toys was between 34% and 50% suggests that the need to make sales and move inventory is a bigger concern than profit margins. 

Other data points also hint at the challenges retailers face this year…

For instance, the National Retail Federation says holiday retail sales rose 13.5% last year and 9.3% in 2020. But this year, they will only grow 6%-8%, to $942.6 billion and $960.4 billion. It could be argued that the current inflation rate will account for much of this year’s sales growth. 

Lower-income families (under $75,000) are expected to spend less this year versus last year. 

Then there’s Black Friday foot traffic, which is estimated to be up between 3% and 7%. Those are not what you’d call robust numbers.  

All in all, there’s plenty of reason to suspect that the 2022 Christmas shopping season isn’t going to be a particularly good one. 

About That Santa Claus Rally

It is generally assumed that the stock market will trade with a positive bias as we approach Christmas. And sometimes, the good vibes will even manifest and a solid rally higher, otherwise known as the “Santa Claus Rally.” 

Sadly, I don’t think we will see much of a “Santa Claus Rally” this year. Yes, the retail picture factors into that. But I’m also looking at the technical picture of the S&P 500…

s&p 500 chart

The S&P 500 has already put in a pretty good rally since mid-October. It has moved firmly above its 50-day moving average (purple line) at 3,794. And it is currently making a run at the 200-day moving average (black line) at 4,054. 

Now, the 200-day moving average is widely considered to be the long-term trend line. When the S&P 500 is above the 200-day MA, it’s a bull market. Below that point, it's a bear market. You don’t need me to tell you we’ve been in a bear market most of this year. 

It is encouraging to see the S&P 500 rallying close to the 200-day MA. And it would be even better if the index could move above it and signal a new uptrend for stock prices.

But notice how the 200-day MA line in black coincides with the green line that I’ve drawn. That green line is the downtrend line that has marked the tops for this bear market since last December.

Here’s a look at that same downtrend line on a 5-year chart (with moving averages removed for clarity)…

s&p 500 chart

It is highly unlikely that the S&P 500 breaks above that green downtrend line and the 200-day MA around 4,050. Those lines are likely to mark the top of any rally we see this Christmas season. 

Until next time,

brits-sig

Briton Ryle
The Profit Sector

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Tags: Macy’s (NYSE: M)S&P 500Stock Market PredictionsTarget (NYSE: TGT)Walmart (NYSE: WMT)
Briton Ryle

Briton Ryle

I’ve been trading, investing, and sharing my insights with individual investors since 1998.  Back then, the internet was not a very useful research tool. Armed with a library card and a huge budget for the printer, I’d scroll the microfiche for Wall Street Journal and Financial Times articles. I bought technical books on wireless technology and fiber optic networks. I traveled to Chicago to learn the secrets of stock options trading directly from the experts on the floor of the CBOE.  I’ve attended and spoken at more investor conferences than I can remember…. All because I’ve always taken my responsibility to my readers and subscribers very seriously. I refuse to parrot popular opinion, offer up half-baked ideas or publish incomplete or half-hearted research.  There is no shortcut to deep research... becoming as close to an expert on topics, trends, and technology as possible. And the rewards are life-changing. The very first stock I ever recommended was South Korea’s SK Telecom. My readers enjoyed a 150% profit in a matter of months.  And after 25 years, I’ve helped tens of thousands of readers change their financial fortunes.  A few months ago, I donated all my suits to Goodwill, pulled my name off the list of speakers for the big investor conferences, and left the big city for Southern Georgia. The plan was to retire to the banks of a tidal creek that splits off from the St. Mary’s river as it enters the Atlantic between Cumberland and Amelia islands... and trade stocks when I felt like it. But, I guess retirement wasn’t for me after all. I’m back, and this is gonna be something special. 

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© 2022 The Profit Sector, LLC. All rights reserved. Our website provides stock market research, commentary, and analysis. Information is provided “as is” and solely for information purposes, not for trading purposes or advice.

Nothing on this website should be considered personalized financial advice. Any investments recommended herein should be made only after consulting with your personal investment advisor and only after performing your own research and due diligence, including reviewing the prospectus or financial statements of the issuer of any security. The Profit Sector, its managers, its employees, affiliates and assigns (collectively "The Company") do not make any guarantee or warranty about the advice provided on this website or what is otherwise advertised above. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. The Company is not affiliated with, nor does it receive compensation from, any specific security. To the maximum extent permitted by law, the Company disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations provided herein prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.

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