Retailers Need A Christmas Miracle
XRT is showing huge weakness in a number of areas. I think the selloff in the sector is just getting started and that XRT is toxic. There are individual names I like in retail but the ETF should be avoided or shorted. The recent market selloff has hit a number of sectors and names but more than most, the retailers, shown here using the SPDR S&P Retail ETF (NYSEARCA: XRT ), have been crushed. Weak earnings reports from just about everyone includi ng Macy’s (NYSE: M ), Nordstrom (NYSE: JWN ), Cabela’s (NYSE: CAB ) and Fossil (NASDAQ: FOSL ), ju st to name a few, have investors on edge and selling anything and everything retail related of late. The chart below shows just how ugly things have gotten and with the Christmas shopping season upon us, one may expect XRT to outperform. However, I’m not so bullish. (click to enlarge) The sector as a whole has been struggling since the market hit its highs back in July. XRT failed to break out and make a new high at that time and that signaled the top in a big way. Since that time we’ve seen an epic break down and the XRT and individual names alike have been pummeled to varying degrees. The culprit has been terrible earnings reports from a number of retailers as pockets of strength are very difficult to find these days and that means investors are selling first and asking questions later. Certainly, this is not the sign of a healthy sector. We’ve seen weakness in all sectors within the broader retail industry including handbags, general line retailers, apparel, and the list goes on. No one has been spared from the recent rout and it seems that the Christmas shopping season is set to be weaker than last year’s. Black Friday must be strong or the XRT could fall off a cliff in the coming weeks because Q3 earnings from various retailers have done nothing but fuel pessimism. Looking at the chart above, the daily timeframe looks like it is trying to bottom. There is a lot of support in the $40 to $42 area from a previous channel XRT eventually broke out of so there is some hope for bulls there that if the channel can hold, XRT may form a base in this area. In fact, the momentum indicators are showing some divergences as lower lows in price are not being met with lower lows in momentum, a bullish sign that the selling is abating somewhat. That is certainly not a reason to buy the ETF but it does mean that if XRT can stop the bleeding, we have a potential base forming in the short term. Over the long term, the picture is much less rosy. This chart shows XRT on the weekly time frame over five years and as we can see, the longer term is much more bearish. (click to enlarge) XRT blasted through the uptrend that was in place form the 2011 lows earlier this year, a very bearish development. It has also been making new lows in the momentum indicators since April, well before the actual top in price occurred. This was a signal to get out as buying interest was waning significantly. We continue to see momentum on the weekly time frame coming in very weak and in a bearish range and that is extremely bearish for the stock right now over the medium term. The same support levels apply here but the weekly time frame looks a lot worse than the daily chart. That would indicate there is the potential for some mean reversion in the short term but longer term, a lot of damage needs to be repaired before XRT can move higher. And given the rock bottom sentiment and terrible fundamentals right now, that seems like a tough road ahead. If we compare relative strength in the XRT to the broader market – as represented by the SPDR S&P 500 Trust ETF ( SPY) – we can see the selloff is not tied completed to the broader weakness in equities. This is a story of sector-specific weakness and that also bodes particularly poorly for XRT heading into the holiday season. (click to enlarge) We can see that XRT goes through very clear trends against the broader market of outperformance and underperformance and has been doing so for years. The problem is that the recent underperformance has been sharp and brutal as relative strength broke through the support that was formed for almost all of 2014. In other words, retail couldn’t really be weaker right now as it slices through its former uptrend and support levels including relative strength. If we look at the momentum indicators on the relative strength chart, they are horrendous. Momentum continues to get more and more oversold instead of bouncing and that is one of the most bearish things that can occur. In short, the latest round of underperformance for XRT looks set to continue and that looks bad for the ETF heading into Q4 reports. Fundamentally, I think this is also the wrong time to buy XRT. December is typically a pretty strong period for retail stocks because of the Christmas shopping season but this year, sentiment has flipped entirely. Anything retail-related is getting crushed even when decent results are posted. Bellwethers like Macy’s and Nordstrom were decimated on relatively small misses/guidance cuts simply because sentiment is beyond negative at this point. In short, the environment for retail stocks is so unfavorable right now that I don’t think it matters what news comes out; it is all being taken as bearish at this point. I think there are individual names within the sector that can be bought including the ones I linked to above. Some stocks have been beaten down like they are going out of business and that is simply not the case. My favorite pick in the retail space right now is Macy’s but I like others as well. What I don’t like is the sector as a whole as weaker names are driving the XRT lower and I think all evidence is pointing to more downside action in XRT. Sentiment is showing no signs of bottoming, the fundamentals are weak after a rough Q3 reporting season and the charts really couldn’t be worse. If you want to be in retail, please don’t buy XRT; pick the names you like the most and go that way because this sector is falling like a rock.