By  on September 1, 2010

September started off with a retail stock bang.

The sector shot up 3.7 percent Wednesday, registering its best showing since May after unexpectedly strong growth in the U.S. manufacturing sector hinted that the recent doom and gloom in the markets could be overdone.

Shell-shocked investors might also have gotten just a bit giddy given the dearth of good news and taken money from safer bets, like utility stocks, and moved it back into retail.

“It’s kind of like the ‘Karate Kid’; instead of wax-on, wax-off, it’s risk-on, risk-off and today it’s risk on,” said Paul Nolte, managing director at Dearborn Partners in Chicago.

Nolte noted the Dow Jones Industrial Average, which perked up 2.5 percent to 10,269.47 Tuesday, has been caught between 9,800 and 11,000.

“The daily movement is a lot of noise about nothing,” he said. “Not much has changed in the overall economy as well as in the equity markets until that range gets broken.”

The S&P Retail Index jumped 14.85 points to 411.59. Among the retail gainers were The Bon-Ton Stores Inc., up 10.6 percent to $7.02; The Talbots Inc., 9 percent to $10.88; Stein Mart Inc., 8.2 percent to $7.82; Macy’s Inc., 4 percent to $20.19; Kohl’s Corp., 3.1 percent to $48.40, and Aéropostale Inc., 2.7 percent to $21.87.

Some of the air came out of Saks Inc.’s stock, which fell 6.1 percent to $7.42 following Tuesday’s 19.7 percent rally fueled by takeover rumors.

The low expectations for retailers have led to low stock prices, relative to earnings.

“You’ve got some abjectly cheap stocks that have some pretty good performance outlooks,” said Robert F. Buchanan, an assistant finance professor at Saint Louis University and former research analyst, citing Kohl’s and Aéropostale.

Competition for shoppers’ dollars is also heating up.

“Let’s say consumer spending remains weak — what do you have to do as a retailer to post good numbers?” asked Buchanan. “You have to punch another retailer in the nose and take her market share away.”

How the latest bout went will become clearer today, when retailers report what are generally expected to be lackluster same-store sales results for August. “The bar’s been lowered, expectations have been reset for the back half at this point,” said Amy Noblin, analyst at Weeden & Co. “We’re certainly not expecting anything big out of August sales. Investors are really trying to gauge whether the level of guidance that was provided over the last couple of weeks was provided at the low point of the quarter.”

The Institute for Supply Management said the U.S. manufacturing sector expanded more than expected in August. The group’s PMI Index rose to 56.3 in August from 55.5 in July, where economists expected a slowdown to 53. Anything over 50 indicates growth.

The stock charge was strong enough to defy a negative take on jobs from the ADP National Employment Report, which showed that private sector payrolls slid by 10,000 in August versus July. Investors are still looking ahead to Friday’s employment report from the Labor Department, which is expected to show that payroll losses moderated.

“The sentiment in the market has been just so horrendously negative for a number of months now that any kind of economic data that is suggestive of real recovery is greeted with enthusiasm,” said Kenneth Stumphauzer, analyst at Sterne Agee. “We’ll probably see a lackluster jobs number on Friday and we’ll probably give it all back.”

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