Friday’s GDP print of 1.2% for the 2nd quarter places the average for the first half at 1%, which as I highlighted yesterday (here), if not revised higher would be the weakest start to a year since 2011. We know that consumer spending makes up nearly 70% of GDP, and that was strong at 2.83%, which some economists pointed to as the sole bright spot in the print. U.S. corporations are not spending, and aside from June non-farm payrolls of 270,000 (we will know July on Friday at 8:30) the U.S. economy been adding fewer and fewer jobs in every consecutive print since December.
This morning, we got worse than expected July auto sales with Ford (F) & General Motors (GM both down about 4.5%, homebuilders for the most part are down 3x as much as the S&P 500 with Toll Brothers (TOL) and Lennar (LEN) down about 2.5% and department store stocks are getting destroyed with Macy’s (M), Kohls (KSS), Dillards (DDS) & Nordstrom (JWN) down between 6.5% and 8%.
Nasty action to say the least, and if we were to see a disappointing July non-farm payrolls number on Friday morning we could very well see a re-tracement of some of the recent gains in the retail etf, the XRT, which, despite today’s 2.4% decline is still up about 10% from its post Brexit lows in late June.
The XRT has been a massive under-performer over the last year and half, still down 15% from its 2015 highs. While the etf just last week broke out above the downtrend that had been in place since early July 2015. But the failure below the downtrend on fundamental news for the space could put a retest of $40 in play in the coming months:[caption id="attachment_65475" align="aligncenter" width="600"] XRT since Jan 2015 from Bloomberg[/caption]
Short dated options prices appear cheap, with 30 day at the money implied volatility at 19%, just recently off of its 2016 lows:[caption id="attachment_65474" align="aligncenter" width="600"] From Bloomberg[/caption]
I don’t love the idea of pressing a short on such a sharp down day, so I’ll look for a bounce tomorrow, prior to Friday’s NFP number. One trade I might consider is buying the Sept 44/40 put spread vs the stock at $43.86, this trade starts off in the money and offers a potential payout of nearly 3 to 1. But I’ll be patient and try to catch am morning bounce.