XRT: Holiday Hangover in Retail Stocks Spells Trouble

by Tyler Craig | January 14, 2014 3:12 pm

Monday’s downdraft in equities while widespread was far from equally distributed. While some spots survived the bear raid relatively unscathed, others — like the retail space — were flogged mercilessly. Indeed, the holiday cheer that led many investors to snatch-up consumer retail stocks heading into December has all but run out, leaving a terrible hangover in its place.

Since the dawn of the ongoing bull market in the dark days of 2008, the SPDR S&P Retail ETF (XRT[1]) has been the champion of stock buyers rising — you ready for this? — 481%. Its relative strength along the way was relentless.

It appears, however, that times are a-changin’.

While it’s important to avoid reading too much into any single day’s performance, Monday’s slide in XRT was a doozy. Consider it a bearish exclamation point following a series of worrisome developments.

Here are the top three starting with the most severe:

Relative Strength Reversal

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Since XRT began its epic climb in 2009 its comparative relative strength line (CRS – bottom panel in chart) entered an uptrend. Prior to this week, any and all attempts to reverse this trend have failed, revealing the bulls’ unyielding dominance in the land of retail.

With the recent weakness in XRT, however, the relative strength has faltered with a break of the four-year trendline.

Double Top

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With Monday’s freefall, XRT broke below a key short-term support level at $85, thereby completing a double top pattern. As the name suggests, the double top is a bearish price pattern occurring at the end or top of an uptrend. The recent completion and confirmation of the pattern suggests the XRT will go sideways at best or start a full-fledged downtrend at worst.

The onus is now on the bulls to prove whether or not they can overcome this ominous development.

Volume Elevation

The final bearish sign is the heavy volume accompanying the selloff. The elevated participation in yesterday’s bloodbath marks it as a definitive distribution day, suggesting active selling by institutions. Additional liquidation by the big boys may continue to exert downward pressure on XRT.

In the short-run, the XRT is a tad oversold, so it’s not surprising to see it bouncing back in today’s trading session. If the recent bearish signs are any indication, however, traders are better off selling rallies in XRT than buying dips.

Consider buying the March 85 puts for around $2.60 to profit from the continued demise of retail in the coming months. The risk is limited to the initial debit paid while the reward is unlimited. The trade becomes even more appealing if XRT can rally another day or two before heading south again. That should offer you the chance to buy the put even cheaper.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. XRT: http://studio-5.financialcontent.com/investplace/quote?Symbol=XRT

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