Friday’s Opening to the Holiday Season Could Be Optimistically Black from a Retail Standpoint

The indices ended last week’s trading session virtually flat.  The Dow gained .5% while the S&P 500 lost a negligible .003% and the NASDAQ lost a tad more listing a 1% decline.  Investors seem to be awaiting a sign for which direction the markets will move with the advent of the holiday season upon us.  Black Friday is approaching for the year and the day could potentially provide some very interesting economic figures that could offer a level of confidence within consumers.  Retailers will be vying much harder than usual to gain what was once known as the almighty dollar from the masses that historically barrage retailers on this day after Thanksgiving.

As alluded to in the subtitle, the U.S. could see a Black Friday from both an investment and retail point of view.  In the investment realm, a black day for the markets depicts an extreme catastrophic day for equities.  The term Black Friday originated as an investment title back on September 24, 1869.  On that day, gold speculators tried to corner the gold market unsuccessfully and crashed the stock market.  Since then, the use of the word black in relation to a trading day for the marketplace has been used to depict other disastrous days for stocks.  The beginning of the Great Depression is referred to as Black Tuesday.  On that day back on the 29^th of 1929, the Dow made a dramatic drop to start the greatest economic downturn for our country.  Black Monday refers to October 19^th of 1987, the day when the Dow had its largest one day decline in its history when it did a nose-dive of more than 22%.

Conversely, a Black Friday for retailers across the country signifies a positive day.  This is related to the accounting methodology relating to the recording of losses and profits.  Losses are reported in red while profits are reported in black, hence, giving meaning to the name for this day from a retail perspective.  More propaganda surrounds this day than any other one on the calendar as consumers gear up for the holidays with gifts for the year’s most festive season. A noteworthy percentage of retailers who are in the red up to this day cross the threshold of profitability on Black Friday, especially during recessionary periods, because it accounts for one of the largest days for sales volume. It is imperative that these stores capture the greatest amount of the volume as possible as those retailers that are already in the black always fight hard to increase their “black” number on this day.   

What Does This Mean For the Markets and the Retail Environment? 

In relation to the financial markets, the term black has always been associated with a day that is so treacherous in the marketplace, as depicted above, that it only occurs once every numerous decades.  The Black Friday that is upon us, given this name for its relationship to yearly retail profitability, can be construed to portray the deep recession we are currently enduring as it is the second greatest downfall in the history of the U.S.’ economy.  Thus, the Great Recession we are engulfed in also has started a historic pattern of occurring once every numerous decades.

Investors, the U.S., and the world alike will be anticipating the sales figures that come about from the massive price reductions that will occur on Black Friday in the hope that the results show an increase in consumer confidence.  The exact figures from this day typically come out in later reports by companies and are a large contributor to economic readings such as the CPI (Consumer Price Index.)  Headlines will be abundant, though, throughout the day indicating the sentiment for consumer spending.  The more retailers that can enter the black for the year, in addition to those that increase profits, the more optimistically the stock indices will react due to this fact albeit it may be for the short-term.    

Interestingly, however, is the fact that estimates of consumer spending are not only being gauged by the retail sector and financial analysts, but also via the website Bookmaker.com according to an article on CNBC.com on November 13^th.(1).  Bookmaker.com, referred to as a foremost betting place on the Internet, approximates that 161 to 180 million consumers will hit stores on Black Friday.  It goes on to state they will spend $300-$400, on average, between physical and virtual spending avenues.  These figures were taken at the time the article was written.  To my knowledge and likely to that of the investment community at large, this site provides the closest figure that would substitute for a consensus figure for Friday’s spending estimates.  Time will tell if sites such as this will develop in the future and be predictors of spending habits for Black Friday while also becoming widely recognized indicators for market direction. 

From the supply side of the equation, stores have been already presenting heavy discounts for consumers the past several months to entice them.  It should be stimulating to see just how low they will go to drive sales within the snake bitten financial environment for the biggest retail day of the year.  On the demand side of the equation, it will be interesting to see how individuals react to the extremely low pricing procedures and buy up goods for this holiday season.  Either way, most industry experts are expecting a more positive movement in spending compared to last year’s Black Friday revenues which took place near the start of the recession.

Source:  1) Berk, Christina C.  “Sports Betting Web Site Sets Odds on Black Friday.”  CNBC.COM.  13 November 2009.  Web 23 November 2009. 

Fundamentals 

For the week following Black Friday, the following are important reports and events related to the current state of the economy that could have significant impacts on the direction of the indices:

 Week of November 30, 2009 to December 4, 2009

(Source: Econoday.com)

Technicals

Sentiment

The CME Group’s final report on volume and open interest for the conclusion of the business day November 23, 2009 provides the figures of 18,969 puts and 16,009 calls outstanding for the December S&P E-mini.  These numbers provide a put/call ratio of 1.18 which is still a slightly bullish indication from the view of a contrarian.  This sentiment indicator is down only .01 points from the ratio in my last report which depicted a 1.19 reading using the CME Group’s final numbers for November 17^th. 

The .01 point difference between the two ratios above marks the slowdown in the rapid declines of the put/call meter that has been portrayed throughout my previous reports.  The investment world, as mentioned in my last writing, is nearing a neutral zone as far as market direction is concerned.  

However, the precipitous decline in the ratio has halted, at least for the time being, as investors are maintaining their stance for the most part on which direction they believe the marketplace will move.  According to this recent calculation of 1.18, the investment community, as an aggregate, has a slightly bearish bias for the indices which is bullish for the contrarian investor.           

Recommendation

Sell ESZ9 at 1109.50.

Place protective stop at 1114.

Liquidate for profit at 1103.

James M. Gangloff, MBA
Senior Research Analyst / Stock Market Indices
Portfolio Strategist / Managed Futures
PFG BEST
Toll Free:  800-275-8844
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E-mail:  jgangloff@pfgbest.com

For further information regarding the logic behind this report, please e-mail or call me at my information listed above.  I value the thoughts and opinions of those that follow my stock indices reports and even incorporate their points within my research as often I am provided information from readers that warrant documentation.   Additionally, our diverse investment panel at PFG BEST will assist you with obtaining your personal financial objectives through our experienced financial groups. 

Contributory recommendations on the S&P 500 E-minis and the other indices are available by contacting myself or Bill Gordon, Senior Technical Analyst, at 1-800-275-8844.

Happy Thanksgiving & Good Shopping this Black Friday!