Retail ETFs May Have Muddy Path

By Kevin Grewal

The retail sector posted its third consecutive monthly sales gain as department stores posted sales revenues which beat analyst expectations; however, the road ahead still remains bumpy. 

Department store giant Macys Inc. (M) as well as discount store Target (TGT), both reaped the benefits of an increase in traffic and a jump in the average amount spent by consumers, pushing increases in sales by 4% and 2.4%, respectively.    Additionally, Wal-Mart (WMT) stated that it is expecting to pay back its investors by increasing its annual dividend by 11%. 

Increases in consumer spending, and hence retail sales, have been linked to an expected increase in average hourly earnings and average hours worked, giving a boost to disposable income.  Additionally, some sector experts suggest that an increase was inevitable due to such poor sales figures in the month before. 

As for overall bottom line, many retailers have been posting better than expected numbers much due to a combination of these sales increases, declining inventories and an overall increase in operational efficiency.

The sector is so important because it helps get a grip on consumer spending trends, which is so critical to the overall health of the U.S. economy because it comprises nearly one-third of the nation’s GDP.  Despite this recent optimism in the retail sector, a sustained rebound in consumer spending and the overall sector is likely to be an extremely slow and gradual process. 

The main driver behind a sustained rebound in consumer spending is the labor force.  The employment markets have to improve and unemployment numbers must show a steady trend of declines before consumer spending and the retail sector can stabilize and post consistent growth.

In addition to retail stocks, other equities that are likely to be affected by changes in the retail sector include:

  • Retail HOLDRs (RTH), which boasts Wal-Mart as its top holding.  RTH closed at $96.67 on Wednesday.
  • SPDR S&P Retail (XRT), which includes Target and Netflix (NFLX) in its top holdings.  XRT closed at $38.05 on Wednesday.
  • Consumer Discretionary Select Sector SPDR (XLY), which includes McDonalds (MCD) and Walt Disney (DIS) in its top holdings.  XLY closed at $30.93 on Wednesday.

When investing in these ETFs, in addition to overall macroeconomic factors it is equally important to keep in mind the inherent risks they carry.  To help mitigate these risks, it is important to implement an exit strategy which triggers price points at which an upward trend could potentially be coming to an end and enable one to preserve equity.

According to the latest data at www.SmartStops.net, an upward trend in the mentioned ETFs could come to an end at the following price points: RTH at $92.86; XRT at $36.32; XLY at $29.59.  These price points change on a daily basis as market conditions fluctuate and updated data can be found at www.SmartStops.net.

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