Retailer stocks, on average, have not faired well over the last year. While there are individual standouts with strong performance, the industry as a whole has seen stock prices move lower relative to a year ago (or stay about the same). With the S&P 500 up 15% over the last year, retail has been a laggard. There are signs of life, though, with the retail ETFs bouncing off support recently, and challenging short-term resistance levels. It looks like there could be a rally in retail.
The SPDR S&P 500 Retail ETF (XRT) is a broad-based retail ETF with more than 500 holdings. The ETF traded above $50 in 2015, fell as low as $37.80 in early 2016, and has been making big swings between these levels ever since. A bullish feature on the chart is a false downside breakout in March. The price declined to $40.49 on Mar. 22, slightly below the November low of $40.85. The false breakout is important because the price has already been whipsawing back and forth. The last false breakout, in June, saw the price rally from $40 to $46. Based on the swings the price has been making, $46 to $47 is a reasonable target over the next few months. A stop loss can be placed below the $40.49 March low.
Reversals have been swift when the occur. Over the last year, trendline breaks have helped confirm the reversal. The price is currently at a descending trendline in play since December. If the price rallies above it, that will help confirm the swing to the upside.
The VanEck Vectors Retail ETF (RTH) has a much more focused investment strategy, investing in only 25 stocks (occasionally holds 26). This ETF is well above where it traded in early 2015 (about $72). The price declined to $66.92 in early 2016 but then rallied to a new high of $82. Since that high, in August, the price is moving within a triangle pattern. The price recently bounced off triangle support, indicating a move toward the top of the pattern at $80.
Watch for a breakout above the triangle pattern, signaling a larger advance after two years of mostly sideways movement. If and when that breakout will occur is unknown, but buying near $78 (bottom of triangle) or on a breakout above $80.30 (top of the triangle) present opportunities to get into a position in case the leg higher does occur. Based on the size of the triangle, an upside breakout provides a price target of approximately $88.50. $80 has been a tough level to reach and hold above over the last two years, but if the price can bust through that level, a strong rally is possible. For managing risk, stop losses go below $77.
The Bottom Line
These retail ETFs move differently from one another because they have different holdings, but both are bouncing off support and challenging a short-term resistance area. A break above the short-term resistance (triangle in RTH or trendline in XRT) would help confirm a further move to the upside.
Some caution is warranted, though. These ETFs have been weaker when compared to the rest of the market, so if the prices start to slide lower, there is no reason to stay long in the short-term. A significant decline could ensue, allowing for short trades or a lower long entry point down the road.
Disclosure: The author doesn't have positions in the ETFs mentioned.