For 6 months, investors have been buying the idea - pitched by any and every status-quo-sustaining talking head, politician, and central banker - that low oil prices are unequivocally good for America. This has manifested itself in retail stocks handily outperforming the S&P. However, as Bloomberg notes, the last few weeks has seen that reverse dramatically as it appears investors, losing faith in the big-takers, have realized that "consumers aren't spending as much of the money saved from lower gasoline prices."
In the past year, there’s been an inverse relationship between the price of crude oil and the relative performance of retail stocks. An almost 60 percent decline in oil between June 2014 and mid-March contributed partly to the rally in shares of these companies as “investors anticipated a boost to consumption that would benefit retailers’ profitability,” Maley said. “The retail fund’s recent underperformance reflects a partial reversal of this bet,” which could be more pronounced if oil trades above $60 a barrel.
As it turns out, “consumers aren’t spending as much of the money saved from lower gasoline prices,” Maley said.
- Retail sales, excluding automobiles and gasoline, have been below the median forecast of economists surveyed by Bloomberg in each of the last four months.
- Americans saved 5.8 percent of their disposable personal income in February, the highest since December 2012
There are other reasons that underscore a bearish outlook for retail stocks, Andrew Burkly, head of institutional portfolio strategy at Oppenheimer & Co. in New York, said.
- The ETF formed a so-called divergence relative to the broader market, falling this month after nearly matching the previous high reached in October 2013. The ETF’s failure to surpass the previous high relative to the S&P 500 is a bearish signal because it indicates investors are allocating less money to the retail group.
- Short interest is near the lowest level since 2007, reflecting bullish investor sentiment. That may set the stage for early betting against the retail group and invite an increase in short selling.
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Is the dream over?