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Why Wal-Mart’s pain could be good news for stocks

Wal-Mart badly lagging the market
Wal-Mart badly lagging the market

Wal-Mart shares hit a 52-week low and are down 20 percent from highs in January. But if the chart work of one technical analyst is correct, that could be good for the rest of the market.

"Some of the most bearish stocks we've found are stocks like Wal-Mart, Procter & Gamble, Coca-Cola—countercyclical safety stocks," said Ari Wald, head of technical analysis at Oppenheimer.

Wald charts the relative strength of Wal-Mart to the by dividing the price of the stock with that of the index. In doing so, he notices a strong multiyear downtrend in Wal-Mart compared to the rest of the market.

While Wald's analysis might spell trouble for Wal-Mart, he maintains it is good for stocks as a whole. Wald is bullish on the market, particularly with sectors like financials and technology.

"This is a sign that investors are still embracing risk," he said. "That's a healthy thing for the market. We think that overall stocks continue to grind higher because of it."

But Wal-Mart's stock may really be threatened by the economy's fundamentals, says Larry McDonald, head of U.S. macro strategy at Societe Generale. Though improving data is leading many to expect a rate hike later this year, McDonald notes that the U.S. is not in the same shape it was during the last series of rate increases.

"Take a macro look at the market versus Wal-Mart and the economy," he said. "Nominal GDP today is almost minus 1 percent. ... The last time we hiked rates in 2004, nominal GDP was up close to 8 percent."

McDonald added that the employment cost index is 1 percent compared with 5 percent in 2004 and that a large percentage of new jobs recently created were from students returning to the workforce.

"There's just not a lot of economic healthy activity that would support retail stocks like Wal-Mart," he said.

To McDonald, then, Wal-Mart's dismal performance may actually be signaling bad news for the overall market.

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