Despite potential obstacles such as rising input costs, weak consumer confidence, and high unemployment, retail stocks have actually performed rather well in the past year.

On Thursday, we may have found out why: the sector appears to be flourishing even in the face of macroeconomic headwinds. A wide swath of retailers reported solid year-over-year same-store sales numbers, driving the stocks sharply higher. The sales gains appeared to have been fueled by three elements: better weather, falling gas prices, and price discounting ahead of the key back-to-school season.

In total, retailers reported same-store sales growth of about 7%. The results were strong almost across the board:

Expected                  Actual

Costco                 12.7%                      14.0%

Gap                      -2.3%                        1.0%

Saks                      7.0%                       11.9%

Macy’s                  5.0%                        6.7%

Target                   3.2%                        4.5%

Kohl’s                    2.9%                        7.5%

TJX                        2.2%                        5.0%

Limited Brands   3.8%                       12.0%

Dillard’s                3.3%                        6.0%

Walgreen              2.9%                        4.8%

JC Penney             2.3%                        2.0%

At this point, investors may be wondering if retailers still have any room to run. At midday Thursday, the Retail HOLDRs (NYSE:RTH) exchange-traded fund stood 2.5% higher on the day and about 9% above its low of early June. Granted, most retailers have robust underlying business trends and valuations near the low end of their five-year range. At the same time, however, the economy remains in rough shape. Last month’s weak jobs data has since been followed by disappointments in consumer confidence, personal income, and personal spending. What’s more, we are now entering the back-to-school period – in which discounting should be less of a factor – and retailers will need to surpass a higher bar following the strength in June same-store sales.

What, then, is the appropriate strategy for investors at this juncture? First, avoid the potential value traps posed by retailers that have suffered bad results of late, such as Staples (NYSE:SPLS) and other office-supply providers, Best Buy (NYSE:BBY), and J.C. Penney (NYSE:JCP). Positive surprises can certainly drive these stocks higher, but until the economy shows some more life, the safe bet is a “show-me” approach with the sector’s laggards. Second, don’t chase retailers whose technicals have moved to extreme overbought levels. This category has become crowded in recent days, as a quick scan through industry charts shows numerous retail stocks trading well above their upper Bollinger bands, and with stochastics and RSIs sitting at perilously high levels. This trend can be seen in the RTH chart:

As a result, the smart approach is probably to wait for the sector to cool off somewhat, then look for opportunities in retailers that have lagged year-to-date and/or where fundamentals appear to be in good shape. Names to put on a shopping list for further investigation include the two giants – Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) – as well as Lowe’s (NYSE:LOW) and smaller players such as Kohl’s (NYSE:KSS), Big Lots (NYSE:BIG), and Ann Taylor (NYSE:ANN).

The bottom line: Don’t get carried away with the retail rally, especially with the broader market having risen so much in the past three weeks. Instead, now is the time to be patient, be selective, and as always, head to the mall and take a walk through the store before you buy any retail stock.