Cramer: Retail Rally Shows the Perils of Being Too Negative

 | Apr 06, 2017 | 3:44 PM EDT
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It's the anti-Amazon rally! Yep, retailers, bricks-and-mortar retailers, led the market today and they set the tone for the entire tape.

The stocks of so many household retailers, Kohl's (KSS) , Macy's (M) , Nordstrom (JWN) , Target (TGT) , L Brands (LB) , Bed Bath & Beyond (BBBY) and Costco (COST) soared while Amazon's (AMZN) winning strike finally ended at eight days and a 20% rise for the year.

What happened? Are we going back to the mall all of a sudden? Are consumers at last saying, "You know what, I want to try things on. I want to feel that fabric."

No, not at all. Don't be silly. Today's a classic relief rally, one where stocks just got way too compressed and shareholders way too depressed, more than both should have been, and then we got numbers, and the numbers? Well, they weren't so bad. For as negative as portfolio managers had become on retail, it didn't take much to get the group raging. Consider it the equivalent of a bear, this time Smokey, suggesting that a few burning embers left over from a campfire could cause a forest fire.

Today we had a forest fire in retail.

As is almost always the case, we have to set the scene. In the last few weeks, we have had some pretty horrendous retail stories out there. We got that slap upside the head last week from Lululemon Athletica (LULU) that caused the stock to drop more than 20%. We heard earlier in the week from Urban Outfitters (URBN) that there's been no turn in the business. If anything, it's gotten worse. We had the Sears Holdings (SHLD) "going concern" letter suggesting the company's at death's door.

Then yesterday we got two really important data points that can often lead to a short squeeze, where hedge fund managers who have been betting against a group or particular stocks in that group find themselves scrambling to bring in their shorts, or buy the very stocks that had been going down pretty consistently in what seemed like an endless, protracted downturn.

First, Citigroup's credit research department put out a huge sell recommendation on the retailers. Titled "Is Retail the Next Big Short," referencing the book and movie describing the giant bet against housing that paid off huge, Citi advised people that it was time to short the retailers aggressively. The piece is well reasoned, it's thorough in its thoughtfulness about the online grim reaper, with a fantastic analysis headed "Death by a Thousand Clicks."

Here's the issue. If you read it, you would want to short every single retailer including the ones that are listed as ripe for targeting. It was a well-written obituary for bricks-and-mortar retailers.

Moreover, House Speaker Paul Ryan and his minions have been pushing this border tax that is meant to pay for the corporate tax cut by putting a tax on all imports sold here. Given that 90% of the goods retailers sell originate overseas, the border tax is really just a national sales tax that either is paid for by the consumer or is eaten by the retailers. We know from many of the retailers we interview that a border tax would be devastating.

Yep, Ryan and Credit Suisse have been writing an obituary for retail and the hedge funds wanted to cash in on it. So gentlemen placed their bets and waited for the undertaker. I guess you could say they love the smell of embalming fluid in the morning, it's the smell of victory.

Then we got a second clarion call to sell from another quarter: the Federal Reserve.

Yesterday the Fed released its minutes for the month of February. We heard that some Fed members believed that stock prices had gotten too elevated. Yep, the Fed's giving you the big-short high sign, and who doesn't want to go with that? The market fell like King Kong from the Empire State Building.

Forget that the Fed is 0-for-2 in its stock market calls in the last 21 years. That's right, 21 years ago, then-Fed Chairman Alan Greenspan, said he felt the stock market, which had been rallying for a time, suffered from "irrational exuberance." Oh no! What happened? The Dow Jones average plummeted from 6521 to 6308 10 days that shook millions of investors.

Then? Take a look, next stop 11,722. That's right, there were no dips, no swoons, no corrections of any magnitude until Dow 11,722. You had to buy that Greenspan-inspired dip with both hands.

Second cut at the sell ball? Back in July 2014, Fed Chair Janet Yellen told us, "Valuation metrics in some sectors do appear stretched -- particularly those for smaller firms in the social media and biotechnology firms." It was tough to figure out which social media firms she didn't like. But maybe it doesn't matter. They pretty much all rallied. Same with the biotechs with a stock like Regeneron (REGN) trading at $306 that day and then never looking back to $594, or Incyte Pharma (INCY) , which stood at $48 and then ramped. And the Nasdaq biotech index, which has the compendium of all biotechs big and small, took a dip to 2604 and then zoomed to 4177 pretty much in a straight line.

What can I say? To me, it feels like an 0-for-3 situation developing.

And how about those retailers? Last night Bed Bath & Beyond reported its usual not-so-hot quarter and the stock was sinking like a stone. Then on its conference call the company didn't take down numbers and told a pretty compelling story. Plus it continues to buy back stock like a banshee, having taken in 100 million shares in five years with $1.7 billion worth of shares left to buy. Hey, this is only a $5.8 billion company. Then L Brands, the company behind Victoria's Secret, reported a number that, while weak, was not followed up with a negative forecast. For once, no number slashing. And Costco, the giant retailer, actually reported comparable store sales that leaped 6%. The Street was looking for plus 3%.

Not only that, but just the day before Macy's reconfirmed its estimates in a meeting the CFO had with a group of investors at a breakfast held by JPMorgan's Matthew Boss.

When you have all these obituaries written and you get actual proof of life, then sellers do not surface. That's the kiss of death for short-sellers. Remember, in order for them to profit, they need sellers to come out of the woodwork. Think about it. If you buy a stock, you need buyers to come in and take it up after you in order to profit. No buyers, no profit.

It's the inverse with short-sellers. They need current investors to panic and spew stock all over the place, not unlike Regan in The Exorcist. If you don't get that kind of projectile vomit of shares that takes stocks down big, then the shorts can't ring up a profit.

But why would you ever panic if companies report and there are no numbers cut? Why would you blast out of a stock in fear when no one else feels the need to sell because there's no real reason to sell?

That's when the real panic sets in. The panic of short-sellers who can't take the pain of stocks going up for the first day in ages. They have to be thinking, what happens if some analyst comes out tomorrow and calls a bottom? What happens if we get a good nonfarms labor payroll number? The pain could be horrendous.

So you get a rally on the backs of those who were too negative.

Does this mean we really have hit bottom in retail? No, I don't think so. If anything, I believe after a couple of days we could see sellers return. But the lesson has been learned. The pessimists got too pessimistic. And the cadaver turned out not to be a cadaver at all.

The moral of the story?

Don't get too negative. You're liable to miss a pretty darned good opportunity if everyone joins you.

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