Can Small Caps Regain Their Footing Soon?

Toni Turner  |

The retail sector took quite a beating this week as weak numbers from the first quarter weighed on earnings. With consumer spending being relied heavily for economic growth, could this excessive softness pose as a red flag for the rest of the year? Additionally, the small-cap market continues to face challenges, but could potential support be on the way? In this week's interview with Toni Turner of TrendStar Trading Group, we discuss what traders and investors should be looking for as these critical areas sort themselves out. 

EQ: Retail stocks are getting hammered this week as a number of big names have reported dreadful earnings. What are your thoughts on this sector?

Turner: If you look at the monthly chart of the SPDR S&P Retail ETF (XRT) , you’ll see that starting from the first quarter of 2009 to the final days of 2013, the XRT has flown almost steadily higher for a gain of about 500 percent. That’s not too shabby. So if we’re looking at the U.S. consumer in that ETF, we can say that we’ve done pretty well.

Now, many of the 61 retailers that reported earnings this quarter missed estimates by just over 2 percent. That’s compared to a long-term average of a 3-percent beat. We also got downward revisions from the likes of Dick's Sporting Goods Inc. (DKS) , The TJX Companies, Inc. (TJX) and Staples, Inc. (SPLS) . That may indicate that consumers have less discretionary money to spend and they may be buttoning up their wallets right now.

Of course, there’s a plethora of online retailers providing competition to brick-and-mortars, and that competition is tough. I believe  we could see retailers sell off at least slightly as we go into the summer months.

EQ: It seems like the market is starting to play the Fed speculation game more intently as we seem to be getting some mix messages recently. In your opinion, is this mostly noise or does it warrant close attention for traders?

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Turner: I think it warrants attention. We had two Federal Reserve officials speak out in William Dudley, President of the Federal Reserve Bank of New York, and Charles Plosser, the President of the Federal Reserve Bank of Philadelphia, and although their messages were different, bond prices rose and yields fell even lower. The 10-year fell to 2.50 percent after they spoke.

So, yes, the market is watching the Fed game more intently. The path of interest rates plays a key role in market direction much of the time. I think that the scrutiny of everything that the Fed says is going to continue, especially if equity prices soften here. Market players will look to the Fed’s comments and actions for clues to the strength of the economy, and as indicators for the market’s direction.

EQ: The decline in small caps as measured by the Russell 2000 has crossed the 10-percent threshold. Are there any key levels to watch here for potential support?

Turner: The iShares Russell 2000 ETF (IWM) has support at recent lows established on Feb. 5 and more recently on May 15 at around $107. If we go back on our chart, we can see that the IWM touched that price again in Nov. 7, 2013, so that’s three points. In addition, that number also served as the highs back in September and October 2013.

So $107 is very likely could be potential support for the IWM. The small cap ETF is once again trading below its 200-day moving average, so we will be keeping a close watch here if it can stay above that $107 level.

I believe that until the IWM trades above its 200-day moving average, I will be wary of any upward moves in the broader market.

EQ: Are there any other sectors or industry groups that you're watching right now?

Turner: It’s kind of interesting because I scanned a list of sectors and industry groups on weekly and monthly charts, and I do that from time to time because it gives me a reality check as to what’s really going on. As I went through them, I decided that a lot of markets have been or still are overbought.

We’re keeping  an eye on the Select Sector SPDR Healthcare ETF (XLV) , to see if it can regain its strength in upcoming months. Also, in the health care sector, we’re watching the iShares U.S. Pharma ETF (IHE) above $127.

I’m mostly in wait-and-see mode, as I want to see what happens with the Ukraine vote this coming Sunday. And, of course, we want to see if the broad market can maintain its bullishness as we head into the final week of May.


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