Retail stocks are starting to show signs of life… and they’re potentially entering a bull market.
Although retail stocks themselves are not a key indicator of broader stock market health, I do think this specific move higher could be noteworthy. For nearly a year, retailers, like small-cap stocks, have gone nowhere. They haven’t bought the “soft landing” narrative at all.
Now though, my signals show signs of positive momentum. Retail stocks are now potentially breaking out and gaining steam.
Why is this happening? Perhaps the simplest answer is the right one. Investors are nervous about being overly exposed to technology stocks, and therefore are rotating into areas which have lagged mega-cap names. Or, investors could be betting that the Federal Reserve will cut interest rates while also maintaining lower inflation. If the Fed achieves this, it would also assuage concerns over a consumer spending slowdown.
Or perhaps, it’s just randomness.
Regardless of the reason for the rally in retail stocks, I believe the movement higher is worth paying attention to. When I look at the price ratio of the SPDR S&P Retail ETF (NYSEARCA:XRT) to the S&P 500, it does look interesting. A rising price ratio means the numerator (XRT) is outperforming the denominator (SPY). This means that retail stocks, on average, are up more than the S&P 500.
And this is the real point here. When I see a chart like this, I think that it is bullish for the market.
The Bottom Line
However, it is important to remember that the chart above is simply looking at the relative performance of retail stocks against the S&P 500. This could also mean that if the broader stock market crashes, retail stocks simply will not crash as hard. This would make sense because they are already trading at a discount.
So, what does this mean for you? Retail stocks have potential right now as a catch-up trade. Investors should consider taking bullish action since there’s more juice left in retailers than in overhyped technology stocks.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
