Retail Breaks Out to New Highs

Key Points

• The retail ETF XRT has made new highs after breaking out of a price range.
•  Consumers are benefiting from tax breaks and low unemployment, giving them extra cash to spend.
• The way the index is built has supported the sector, even though the “retail apocalypse” is upon us.
• However, the breakout is in jeopardy.

Consumer Sentiment Near Expansion Highs

Investor sentiment around the retail sector has been low in recent years, as many investors feared that Amazon and other internet companies are hurting big names like JC Penny’s and Sears. While these two company stocks look dismal, to say the least, the retail sector, as told by XRT, has recently broken out to new highs.

In this blog we analyze the retail sector of the stock market/economy using technical and economic analysis. 

The XRT ETF has made new highs and broken out of a range that initially peaked in 2015. Is there a revival in the retail sector?

Economic Boosts for Consumers

Retail revolves around the consumer. The tax cuts this year should help retail companies in two ways. First, they can help their balance sheet, as less costs will make these companies stronger. 

More importantly, it should also help increase discretionary spending by consumers, because they should have more cash in their wallets. 

Also, the lowering unemployment rate means there are more people able to consume. Rising employment tells us two things. One, employers are busy enough to need more employees, and two there is more money circulating in the economic system. Both are important to the retail sector.

These economic boosts have led to high consumer sentiment. The University of Michigan Consumer Sentiment indicator is a monthly survey designed to measure how consumers are feeling about present and future economic conditions. 

When sentiment is high, consumers are more likely to spend discretionary money. Discretionary money is the extra cash consumers have after paying for their more necessary items. Tax cuts and jobs have increased the amount of discretionary within the economy, and it has pushed up overall sentiment. 

People are more likely to spend discretionary cash when sentiment is high because they feel that the economy is strong, and their jobs safe; they do not need to worry as much about the future. Therefore, they do not need/want to save as much, and they can spend some extra money on new shoes, a new dress, or that fancy watch they have had their eye on.

A Broader Sector: Consumer Discretionary

Before looking directly at the retail sector, we look at the broader consumer discretionary sector. XLY – the Consumer Discretionary SPDR ETF – is one of three main sector ETFs to make new highs after January. The only other sectors are energy and technology. 

With the market struggling the way they are, consumer discretionary stocks are some of the bright spots. Like the retail sector, discretionary stocks have seen some benefits from the current economic environment, and they make them a prime target for investors.

Breaking Down the ETF

While XRT holds stocks like JC Penny’s (JCP), which is down more than -33% year-to-date (YTD), there are some surprises from stocks like Macy’s (M), which is up more than 48%. YTD. 

Something that has helped the sector is high short interest in retail stocks. Investors have dubbed a “retail apocalypse.” The internet has not been kind to retailers and their stores. Now that consumers can find products with ease, and it is shipped directly to their homes, they no longer shop at actual brick and mortar stores.

This has led many investors to short sell retail stocks. So, when earnings surprises happen, and there is high short interest, short sellers buy back shares and quickly push prices higher. Surprises from stocks like Kohl’s and Macy’s have helped the ETF to breakout to new highs.

However, the ETF also holds a couple technology/retail stocks that have really supported the sector. Amazon (AMZN, +40% YTD) and Netflix (NFLX, +90% YTD) are two FAANG stocks contained within the index. These stocks have performed phenomenally over the last few years, but I have my doubts about their sustainability.

Risks to the Sector

The biggest risk to the sector is a trade war. Many retail items are imported from other countries where labor is much cheaper. Tariffs and trade wars will ultimately hurt the sector as costs are raised on their items. This will hurt margins, and their balance sheets will weaken.

Additionally, tariffs and trade wars will also hurt consumers and consumer sentiment. When prices are rising, and jobs are moving overseas, or people are being laid off because of trade disputes, it will ultimately hurt the economy and the likelihood of extra spending at the store. Consumers won’t want to spend the extra money to buy something they don’t really need if they are concerned or uncertain about the future of the economy.

Conclusion

Overall, this breakout is doubtful. The stocks contained within the ETF are all over the spectrum of returns. JCP is down more than 30%, but stocks like M and AMZN are up more than 40%. 

From an economic standpoint it is hard to see retail and the economy getting much better from here. We are in the later end of the expansion cycle, and the current trade rhetoric can have lasting damage on the economy, especially if we move into a full blown trade war.

Lastly, Nike (NKE) reported earnings on June 28, and the stock closed the next day up over 11.5%. Executives from this apparel company offered a great outlook and surprising Q4 numbers, propelling the Dow Jones Industrial Stock higher.

One reason the company has performed so well is because they are bypassing retail stores, and going direct to consumer. This is a trend that has been shifting the retail sector for many years, and one of the reasons for the so called apocalypse. More and more companies are launching their own retail channels and websites where they can deal directly to consumers, and skip the middle man. This is not a good trend for retailers.

The Trade Setup

For the trade, you will want to look for the signs of a strong breakout in the ETF. You will want to look to enter the stock around $50.50, which is a 3% buffer above the resistance line. This will help determine that the breakout is real, and not just part of normal volatility. Your stop should be placed just below the resistance line. That way, you are prepared to sell if the breakout fails.

Read the full blog with charts here: https://www.brtechnicals.com/retail-sector-breaks-out-to-new-highs/

Submitted July 02, 2018 at 03:39PM by BR-Technicals https://ift.tt/2Nl9rYz