May 10th, 2008

Hot Money to Retailers? JCG, ARO, PLCE, TRLG and more

There’s no question as to what’s working in the market these days and it’s worrisome (for most of this analysis I’m going to leverage off of some of IBD information):

  • The top 20 industry groups (out of IBD’s total 197 groups) and consist of 551 stocks (or 7.3% of all the stocks tracked by IBD) and fall in to the following Industry Groups:
    • various Oil&Gas and Energy (287 stocks)
    • various Transportation like rail and truck(44 stocks)
    • various Steel and Metal Ore (85 stocks)
    • various Machinery and Equipment (57 stocks)
    • various Building and Construction (33 stocks)
  • Even more revealing is that an unprecedented 37 of the IBD100 (as determined according to CANSLIM principles) were Oil & Gas stocks (for you math challenged, that’s 37%)!

But there’s no question about it, there’s a speculative bubble that’s been building in commodities, foods and energy and someday that bubble, as do all bubbles, will burst. You know there’s a bubble because two articles in the Sunday NY Times Business Section was about the bubble. Whether it was Neslon Schwartz in “A Peek Behind the Price at the Pump” explaining how the drop in the value of the $US has contributed to the bubble, or Ben Stein in “You Can’t Make This Stuff Up, or Can You?” writing that “bubbles always end, and almost always end badly. So will this one.”

So, even while we concentrate our holdings in Oil & Gas and watch the profits there offset the bigger sums we’re paying at the gas pumps and to heat our homes, it’s prudent to see what new sectors are emerging. The big question is actually, when the hot money leaves commodities, where will it pour into.

Paul Lim, also of the NY Times in his piece, “How to Tell if the Rally is Real“, tells us to watch for small-stock performance, growth stocks coming back into favor over value, the dollar strengthening and technology and consumer discretionary stocks outperforming the rest of the pack. And I think we’re beginning to see that in the Industry Groups that are moving up in rank.

I already wrote about the Homebuilders and related construction industry groups on March 21. But And the sector that seems to have made a dramatic rise in the rankings (in other words, stocks in the industry have had positive relative strength vs. the over all market) over the past couple of weeks are various retailer groups:

Most of these stocks have been beaten up and dramatically below their highs. I wouldn’t recommending you to buy many of them today; you may feel like you were “catching a falling knife”. But many have made significant percentage moves off their lows. Note that the Retail-Clothing/Shoe Industry Group is now ranked 35th, up over 100 positions from where it was just a month ago. Within the group, here are the ones that look furthest along in building a base and present the best charts (click on symbol):

  • TRLG (True Religion)
  • ARO (Aeropostale)
  • GYMB (Gymboree)
  • ROST (Ross Stores)
  • GES (Guess?)
  • TJX (TJX Companies)
  • PLCE (Children’s Place)
  • ANN (Ann Taylor)
  • SCVL (Shoe Carnival)
  • JCG (J Crew)

Of the whole lot, I think I’d go with TRLG (True Religion), JCG (J Crew), ARO (Aeropostale) and PLCE (Children’s Place).

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