The SPDR S&P Retail ETF (XRT) may complete a six-year double top pattern in the coming weeks and break down, entering the sector's first bear market since 2008. Both e-commerce juggernauts and big box superstores could lose ground in the secular downturn, including top performers Amazon.com, Inc. (AMZN) and Dow component Walmart Inc. (WMT). More ominously, the decline could last for many years, given the bearish pattern's massive size and scope.
Trade wars are to blame if a breakdown unfolds, with President Trump's latest tariffs set to affect all sorts of retail and consumer goods. These duties will act as a major tax on consumption, forcing Americans to buy fewer goods or eat up family savings at a faster pace. Even so, more natural forces are also at work, with the 10-year expansion getting long in the tooth and retail stocks notoriously sensitive to economic cycles.
The SPDR S&P Retail ETF opened for business at $18.65 in June 2006 and entered a modest uptrend that topped out in the low $20s in 2007. A steady downtick accelerated during the 2008 economic collapse, dumping the fund to an all-time low at $7.41. The subsequent recovery wave completed a round trip in 2010, ahead of a rally that stalled in the low $50s in 2015. It tested that level and broke out in August 2018, adding less than two points before turning tail in a failed breakout.
The fund established horizontal support in the upper $30s in 2013 and has bounced at that level four times in the past six years. The last bounce took place in December 2018, but the uptick failed to gain traction, stalling at the midpoint of the fourth quarter sell-off. A May decline ended within a point of that level, yielding an even weaker bounce that revealed little buying interest. The latest tariffs have dumped the fund to a two-month low in a trajectory that could break the trading floor.
Amazon's razor-thin margins may come under pressure as it adjusts to tariffs, with its electronic shelves filled to the brim with Chinese imports. The stock rallied back to the 2000 bubble peak in 2007 and broke out in 2010, entering a historic trend advance that accelerated at the start of 2018. It posted an all-time high at $2,050.50 in September and turned sharply lower, dropping to a 10-month low in December.
The stock carved a V-shaped recovery pattern into July, stalling just 15 points under the 2018 peak. It has given up more than 250 points since that time and dropped through the 200-day exponential moving average (EMA) for the third time in five months, highlighting a deteriorating technical pattern that could yield a second trip to the December low. In turn, that price action may complete a double top pattern that signals the end of the decade-long uptrend.
Walmart has drawn one of the sector's most bullish patterns, with many shareholders expecting it to benefit from the misfortune of rivals, like it did in 2008 and 2009. But the mega-chain could face even greater margin compression than Amazon, with Chinese imports comprising an estimated 70% to 80% of all goods. As a result, complacent shareholders could face a rude awakening, caught in a downward spiral that wipes out long-term gains.
The stock finally cleared multi-decade resistance in the $70s in 2017, lifted to $110 in January 2018, and sold off to the low $80s in May. It broke out above the prior high in June 2019, posting an all-time high at $115.49, but has now failed the breakout. This bearish action exposes a trip into the 2019 low, potentially completing a double top pattern, with a breakdown targeting the upper $50s.
The Bottom Line
Retail stocks are in full retreat following the latest tariff announcement and could enter bear markets in the coming years.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.