Wednesday, May 13, 2009

Retail Sales Decline Triggers Market Sell Off

Today's April retail sales release seems to be cited as the cause of today's market sell off. I am not sure the .4% decline in April is the only reason for the market pullback. Retail sales were expected to show a .1% increase so the April sales figure did fall short of the estimate.

(click to enlarge)

retail sales April 2009Inventory related data was also released for the period ending in March. Inventory levels declined by almost 1%, but the inventory to sales ratio has remained at 1.44 for the past two months. Sales continue to decline at a faster pace, falling 1.6%.

(click to enlarge)

inventory and sales data March 2009
inventory to sales chart March 2009
I believe the slightly negative results contained in the above two economic data points provided the catalyst for the sell off. As noted in yesterday's post, stocks had advanced in a nearly uninterrupted pace since early March. The market needed to consolidate these recent gains.

(click to enlarge)

S&P 500 Index and percentage of stocks above 50 day moving average May 13, 2009The percentage of stocks trading above their 50 day moving average fell to about 86%. As the above chart indicates. This percentage has been above 90% since late April/early May. Additionally, the MACD has turned slightly negative at -.707 so is the market setting up for a bigger consolidation?

All of the above data points are rear view mirror looking. On a going forward basis what might impact the direction of the market?
  • investors still have large amounts of cash on the sidelines. A large number of these investors will use the pullback to add to equities. The market decline has resulted in investor's equity allocation to fall below target levels; consequently, this pullback could be short lived and a more significant contraction could occur in mid to late summer after the cash has been pulled off the sideline.
It would have been nice to go all in on March 9th, but that activity goes against the emotional side of investor behavior. At this point in the cycle, being selective and focusing on high quality dividend paying stocks for the foundation of ones equity portfolio should pay off in the longer term.


Drew said...

You assert there is quite a bit of money "on the sidelines" that could be used to push the markets higher. I still cannot fathom how supposedly smart people still think there is this big pile of money sitting around, waiting for a home. There is no sidelines. Please reference John Hussman's explanation for clarity. I expect better from this blog.

David Templeton, CFA said...


I appreciate your thoughts. You may find the following post of interest as it relates to investor cash allocation versus equity values.

Sideline Cash PostMany investors are reallocating out of cash due to low interest rates and into equities. The recent equity market advance is causing investors to feel as though they are being left out of the rally. This is not to say the equity markets are in a long term bull market though.

See secular bear market table in following post.

Secular Bear Market Table