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The Rally for Retail Stocks Might Be Over

Loss of momentum, weak technicals argue for caution

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Throughout this bull market, retail stocks have been one of the most reliable sources of return for U.S. investors.

In the five-year period from 2009 through 2013, the SPDR S&P Retail ETF (XRT) chalked up an average annual total return of 35.6% — nearly double the 17.9% annual return of the S&P 500 Index in that same span.

But so far this year, it has been a different story: XRT has fallen 6% in 2014, far below the -1% return for the broader market. Does this mean the party’s over for retail stocks?

Consumer Confidence Holds Steady

The poor recent performance of retail stocks — highlighted by earnings misses for Best Buy (BBY), Bed Bath & Beyond (BBBY), L Brands (LB), Family Dollar (FDO), Gap (GPS), and Coach (COH) among many others — comes at an interesting time since the economy, by all measures, appears to be picking up steam.

The improvement extends beyond high-profile numbers like GDP and the unemployment rate. The website Trading Economics provides graphs that show the current trends in consumer confidence, consumer spending, disposable personal income, retail sales and more. A look at the various charts shows that all of these key metrics to be improving or, at the very least, staying even.

So what’s the problem? Aside from the constant barrage of negative headlines about retail stocks, the key issue is falling earnings estimates. Almost across the board, the major retail stocks are seeing a loss of earnings momentum, with estimates for the coming year largely flatlining or turning lower.

The poster child for this trend is Target (TGT), which has seen the consensus estimate for the 12 months ended January 2015 fall from $4.94 to $4.28 in the past 90 days.

The second issue is expectations: The sector has defied skeptics by performing so well for so long, that the latitude for disappointment was high — particularly with valuations tracking toward the high end of the historical range.

The resetting of expectations has been especially hard for former high-flying retail stocks such as LuluLemon (LULU), Five Below (FIVE), and Ulta Salon (ULTA), which have printed almost exactly the same chart in the past three months.


What’s Next?

The downturn in retail is worrisome, and while certain underperforming retail stocks such as Target and Limited stand out as potentially fertile ground for short-term trades, the technical damage has been substantial. The XRT is on the wrong side of a double-top, it has broken the trendline that it established in 2013, and it has fallen below its 50-day moving average.

Article printed from InvestorPlace Media,

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