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Can Santa Sustain This Rally?

Stocks are up 16% year to date. We have gone 51 weeks without more than a 2% drop, and each small dip is greeted with bundles of investable cash. But investors are getting nervous.

Earlier this month the S&P dropped 1.1%, partly on fears that the corporate tax cut would not be implemented in the next legislative plan.

Investors’ nervousness is evident in the stock rotation that’s been occurring. Bad news in one sector incites sell orders. But that money is quickly put to work as Investors rotate from one stock sector to the next, looking for the next big rally.

Can Santa save the market with a rally in the retail sector?

You may have heard the term Santa Claus Rally. This designation refers to the upward momentum of stocks in the last week of December and the first week of January. There are many theories as to why this calendar effect is so reliable.

Some blame low trading volume as many asset managers take the week after Christmas as a holiday vacation. Others suggest the outsized buying comes from managers attempting to position themselves with increased bullish exposure as the market starts a new fiscal year.

But the rally I’m thinking of refers to the stocks whose products are actually IN Santa’s bag. Early indications show consumers more eager to spend this year and retailers more conservative with discounts.

Two years of downtrodden sales and a sleigh-full of unloved retail stocks has set up a bullish trade for some retail stocks.

Retail stocks are a cranky group. They are notoriously difficult to predict. With thousands of customers, market seers find it challenging to track how sales are trending. Chains are not opening many new stores so sales growth must come from increasing sales at stores already opened, otherwise known as comp sales.

In the old days, some firms would hire helicopters to photograph parking lots of various stores to track customer traffic. Analysts would walk the malls collecting various data points; percentage of markdowns and length of lines.

The popularity of online shopping makes those qualitative data points less relevant. There is a myriad of paid services that allow firms to record and follow trends in customer visits to various websites.

Amazon’s outsized success moving into every corner of retail merchandise has made owning retail stocks more painful than ever. More than 300 retailers have filed for bankruptcy just this year. The demise of the shopping mall has been well documented and sends shivers down the spine of every retail stock analyst.

Is Amazon’s reign of terror over?

In the past two weeks, a myriad of retail stocks rose double-digits on encouraging sales trends. Hibbett Sports (NSDQ: HIBB) and Abercrombie and Fitch (NSDQ: ANF) are both up 38% and Macy’s (NYSE: M), and Gap Inc. (NYSE: GPS) are up 12% since reporting third-quarter sales.

Sales of many retailers have withered in the past two years. In the boom following the 2008 financial crisis, consumers fattened up their wallets with refinanced dollars and eagerly spent them.

Fast forward to 2014 when e-commerce began to tip the scales away from brick and mortar stores. Comp store sales began to decline, and many retailers suffered negative comp store sales for multiple years.

Some of the improvement is due to the laws of arithmetic. Once sales per store drop to a low level, a small absolute change can make for an impressive percentage increase. But a significant part of the improvement is due to the hard work of fine-tuning inventories, refining merchandising plans and culling excess stores.

I think Santa’s sleigh could keep many of these stocks airborne for the season. While not all of them are buy and hold names, improving sales matched with uber-low valuations make for some terrific values.

And there are boatloads of great trades waiting to be had.

Just last week in my Profit Catalyst Alert service subscribers enjoyed a one week 42% and 37% return on two bullish retail trades. I am searching through Santa’s bag for more.

What To Read Next?

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