Where is the bottom for retail stocks as the broader market sinks deeper into a six-year low?

This story first appeared in the February 23, 2009 issue of WWD.  Subscribe Today.

In a brutal week for the broader market, the S&P Retail Index fared slightly better, closing the week down 11.81 points, or 4.5 percent, to 249.64.

Market experts said the decline may be indicative of more to come, especially as retail earnings season shifts into high gear in the coming weeks, with few companies expected to announce positive news as the recession deepens.

Mark Arbeter, chief technical strategist at Standard & Poor’s, said the S&P Retail Index might not hit bottom for months and could test its low of 213.5 on Nov. 20, 2008.

“Market lows are defined by testing, not hitting bottom,” he said, stressing that “bear-market laws” are characterized by stocks not reacting to bad news.

Amid fears about the stability of U.S. banks and effectiveness of the government’s $787 billion economic recovery plan, the Dow Jones Industrial Average dropped to 7365.67 last week, shedding 6.2 percent, or 484.74 points. The Dow is down almost 50 percent in the last 16 months. The S&P 500 fell below 800 for the first time this year to close the week at 770.05, down 6.9 percent or 56.79 points.

John Lonski, chief economist for Moody’s Investor Services, said retailers could begin to see better news by way of increased consumer spending after June or July, when unemployment should peak. For now, retailers with strong balance sheets and cash on hand are attractive to investors.

“If I put money on the retail world, I would focus on the financially strongest retailers,” he said, referring to companies like Wal-Mart Stores Inc.

Standard & Poor’s Arbeter agreed it will be later in the year before retail stocks hit any sort of a bottom. Some signs of a possible start to recovery would be if the S&P Retail Index remains above its 2009 high of 301.62 points in January for two to six months, he said.

“I would say that this scenario would probably not unfold until the second half of 2009,” he said.