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The Problem I See With Retailers

October 10, 2013

Today I wanted to talk about the problem I see in retail. Outside of Financials, I would say that retailers are one of the most important components in the stock market (and the consumer discretionary space as a whole for that matter). These are the guys you want leading. And for a while now, they have been. But currently I have plenty of reasons to worry and stay away.

Let's start with the shorter term picture, because for risk management purposes this is what's most important. I see a potential double top here in the S&P retail ETF $XRT that is as clear as day. I say "potential" because it really isn't confirmed until the August lows are taken out. But I'll say this: the consolidation in the 2nd top was very flag looking wasn't it? And it broke down, not up - that's a problem. In addition, momentum put in a substantially lower high on that 2nd top of the possible double top - another problem:

10-10-13 xrt

We are going to need a nice consolidation through time and a breakout above last week's highs to invalidate any of these problems. And even then, I'm not so convinced. This is probably because when you put this short-term look into context, there are bigger problems at hand.

Take a look at the longer term weekly chart of retail. As leaders tend to do, the XRT bottomed out in November of 2008, well before the rest of the stock market. Since then, retailers have been in a beautiful uptrend within a well-defined trend channel. What stands out to me is when prices temporarily get outside of the parallel lines. These extremes tend to get back into that channel rather violently. Look at the low in October 2011 and look at the high this August (shaded grey):

10-10-13 xrt weekly

I'd stay away from retail as a group. And I'm sure we'll be hearing about how great of a time it is for them as we enter the holiday season. Please do yourself a favor and ignore that nonsense.

 

Tags: $XLY $XRT $RTH $SPY

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