Retail Funds Break Out to All-Time Highs

Retail exchange-traded funds (ETFs) have surged to all-time highs in reaction to impressive quarterly results underpinned by robust U.S. economic growth, low unemployment and rising wages. Consumer debt has risen to record levels at the same time, led by increases in credit card and non-revolving debt that includes education and auto loans. However, credit card debt has dropped to 26.7% of total debt, far lower than the 38% posted in 2008 just before the economic collapse. This predicts that American shoppers will sustain the current buying spree into the next decade.

Target Corporation (TGT) and Walmart Inc. (WMT) are the latest retailers to report exceptionally strong quarterly earnings, stealing the spotlight from the media's endless obsession with Amazon.com, Inc. (AMZN). Brick-and-mortar retailers have finally found ways to compete with the internet juggernaut, raising hopes that sustained growth will replace several years of market share losses to e-commerce.

Even beaten-down department stores are getting their share of growing revenues, as noted in Mall Anchors Riding Bullish Wave Into Earnings. However, big players have been hit with aggressive sell-the-news reactions despite robust earnings, suggesting that sector capital is now rotating into big box stores. Price action for shares of Target and rival Costco Wholesale Corporation (COST) support this theory, lifting to all-time highs in tandem with major sector funds

SPDR S&P Retail ETF Weekly Chart

The SPDR S&P Retail ETF (XRT) offers an excellent choice for market players seeking broad-based retail sector coverage. The fund tracks a modified equal-weighted index, ensuring that a handful of mega caps won't skew the price chart or annual returns. For example, Walmart comprised just 1.311% of index weighting as of August 2018, just a few clicks higher than Amazon's 1.308% weighting.

The fund completed a round trip into the 2007 high at $22.75 in 2010 and broke out seven months later, entering a powerful trend advance that topped out at $51.25 in March 2015. It pulled back into August and turned sharply lower, bottoming out at $37.80 in January 2016. The subsequent recovery wave ended at the .786 Fibonacci sell-off retracement level in December, giving way to a multi-month decline that ended just seven cents under the prior high in August 2017.

A buying wave into 2018 completed a double bottom reversal, stalling just two points below the 2015 peak at the end of January. It posted a higher low at the 200-day exponential moving average (EMA) in March and turned higher once again, reaching multi-year resistance three months later. A narrow consolidation completed the right shoulder of an inverse head and shoulders pattern just two weeks ago, setting the stage for an impressive breakout that has now posted an all-time high.

On-balance volume (OBV) entered a multi-year accumulation wave in 2010, carving a long series of new highs into the first quarter of 2015. Aggressive sellers then took control, dropping the indicator to a three-year low in July 2017. Healthy buying interest since that time signals the return of institutional capital, while a July 2018 surge to an all-time high adds reliability to the growing uptrend.

The 13-point depth of the decline into 2016 now translates into a measured move target in the low to mid-$60s, signaling a potential gain in excess of 20% from the most recent closing price. This is a relatively slow-moving instrument, so more conservative market players may wish to sit on their hands for now and wait for a pullback that tests breakout support. A brief dip into the 50-day EMA just below $50 could offer a low-risk buying opportunity in this scenario. (See also: Why David Einhorn Is Scooping up Retail Stocks.)

The Bottom Line

The retail sector has lifted into market leadership, with major sector funds breaking out to all-time highs. This bodes well for consumer buying power and higher stock prices in coming quarters. (For additional reading, check out: 3 Retailers to Buy Ahead of Earnings.)

<Disclosure: the author held no positions in aforementioned securities at the time of publication.>

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