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business newsBearish on Retailers? Some Mean Reversion Ideas
Should retailers continue to underperform and should we be in a deflationary spiral and recession, mean reversion could begin in some stocks.
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-- Matthew 20:16
That's right – even the Bible references mean reversion.
Followers of my writings will note my bearish tone on the performance of the Consumer Discretionary sector (XLY), and particularly Retailers. My reasoning for this has to do with the rolling over of the price ratio of the SPDR S&P Retail Index (XRT) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/XRT is outperforming (up more/down less) the denominator/IVV. The opposite is also true.
A downtrend may just be getting started here which could mark a significant end to the leadership and outperformance of all things consumer, which have led markets since mid-November 2008. If weakness does become entrenched, the entire group likely will see increased volatility and selling pressure. Studies show that group performance is far more important to pay attention to than individual stock movement. After all, its obviously easier to invest with the wind at your back when a group is showing a definitive relative trend, so for those bearish on markets and on the industry as I am, take a look below. I ran a screen on all of the holdings within the XRT ETF to identify those furthest away from their respective 20 day (1 rolling trading month) moving averages.
While there aren't any strong consistent themes here, should Retailers on average continue to underperform, and should we be in a deflationary spiral and recession now as the bond market seems to suggest, perhaps mean reversion kicks in to some of the above stocks.
Twitter: @pensionpartners
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