Traders Dump Hedges on U.S. Retailers in Sign of Profit Optimism

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Traders are backing away from bearish bets on U.S. consumer stocks just before a big batch of earnings reports, unconvinced that stagnant retail sales spell doom for the industry.

Demand for options that protect against losses in an exchange-traded fund tracking retailers and suppliers of other nonessential consumer goods in the Standard & Poor’s 500 Index fell to the lowest level in more than a year relative to bullish ones, according to data compiled by Bloomberg. Short interest on the ETF is four percentage points below its five-year average.

Even though U.S. retail sales barely budged in April and first-quarter growth in household consumption slowed, betting against retail stocks has been a losing proposition all year. A gauge of 30 stocks in the sector has rallied 10 percent in 2015, the most of 24 industries in the S&P 500, and is up almost twice as much as the full gauge since 2011.

“The consumer didn’t get as big of a kick from crude oil prices as many expected, and investors are thinking now is the time for them to finally loosen their wallets,” Terry Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said by phone. “The effect has been deferred, but there’s still some pent-up demand.”

The S&P 500 climbed 1.1 percent at 4 p.m. in New York.

Retail Stocks

Netflix Inc. has surged 72 percent this year, making it the best performer out of 85 consumer discretionary companies in the S&P 500. Amazon.com Inc. has climbed 39 percent, while Hasbro Inc. and Yum! Brands Inc. have added more than 23 percent since the start of January.

Home Depot Inc., Kohl’s Corp. and Target Corp. are among retailers slated to report quarterly results in the next week.

Traders may be betting that Wall Street firms have become too pessimistic. In early January analysts forecast first-quarter profits for consumer discretionary companies would expand by 13.1 percent. That’s since been cut to 4.7 percent.

Goldman Sachs Group Inc. says retailers will bounce back because the economy will bounce back. While gross domestic product growth stalled in the first quarter, choked by a slump in U.S. business investment, Goldman forecasts a rebound to 3 percent in the second quarter. Economists surveyed by Bloomberg expect expansion of 3.1 percent.

Outperforming Stocks

The consumer discretionary group “tends to outperform when GDP accelerates,” Goldman Sachs analysts including chief U.S. equity strategist David Kostin wrote in a May 8 client note. It “may be particularly sensitive now given our expectations that the consumer will drive the economic rebound,” they wrote.

Data released on Wednesday showed U.S. retail sales were little changed in April. Consumers have been using the windfall from cheap gasoline to boost savings as wages have been slow to pick up, which may temper the projected rebound in U.S. growth this quarter.

Consumer discretionary companies in the S&P 500 declined of 0.6 percent Wednesday, while the broader index was little changed.

Options Data

Options protecting against a 10 percent drop in the Consumer Discretionary Select Sector SPDR Fund cost 6.3 points more than calls betting on a 10 percent rise on May 11, according to one-month data compiled by Bloomberg. That was the lowest since April 2014 and above the 11 points average for the price relationship known as skew since the start of 2010.

Short interest in the ETF, or bets that the stock will drop, sits at 6.64 percent of shares outstanding. That’s below the measure’s five-year average of 10.76 percent, according to data compiled by Markit Ltd.

“The customer is getting healthier,” John Fox, director of research at Fenimore Asset Management in Cobleskill, New York, said by phone. “People have more money in their pockets, and we’re going to eventually see more spending.”

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