Play Retail Earnings With Retail ETF XRT

With the market bouncing sharply higher today, the question is whether the “correction” is over. Hard to say for right now, since this is primarily an oversold bounce based on news that the Greek bailout is in place. We’d rather base our investment decisions on things we do know rather than the fragile state of certain European economies.

That’s where earnings figure in, so let’s see what we have on tap this week.

Yes, earnings reports are winding down. This week shows fewer than 20 S&P 500 (SPX) companies on the schedule compared to about 90 last week. But there are some major names on the list, including Cisco Systems, Inc. (NASDAQ: CSCO) and The Walt Disney Company (NYSE: DIS).

Food-related businesses have a presence, with Dean Foods Company (NYSE: DF), Tyson Foods, Inc. (NYSE: TSN), and Whole Foods Market, Inc. (NASDAQ: WFMI). Actually, Dean Foods reported a huge miss this morning, falling well short on earnings, while guiding lower for the second quarter. The company also pulled its full-year guidance, never a good sign. The shares were off more than 25% this morning as a result.

Dean was a bearish play we wrote about last week. Hope you got into that trade, as you’d be pocketing a gain of more than 100% had you bought a put option.

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Retail will hog the spotlight this week, especially the big department store segment with J. C. Penney Company, Inc. (NYSE: JCP), Nordstrom, Inc. (NYSE: JWN), Kohl’s Corporation (NYSE: KSS)‎, and Macy’s. Inc. (NYSE: M). Other names of note include Legg Mason, Inc. (NYSE: LM), Electronic Arts, Inc. (NASDAQ: ERTS), and NVIDIA (NASDAQ: NVDA).

Let’s get the details on a few of these.

The table below includes a slice of the action this week, with earnings report dates and what analysts currently expect for profit growth (compared to the same quarter a year ago). We also include a relevant moving average so you can see potential support or resistance (duration in days is in parentheses).

We give an idea of the overall sentiment toward the stock based on our various indicators. Keep in mind that optimistic sentiment represents higher expectations and, thus, can create some vulnerability if those expectations aren’t met. Conversely, pessimism reflects lower expectations that often lead to upside earnings surprises.

And we’re adding the Earnings Radar Index (ERI) score. This proprietary filtering tool ranks stocks from 1 (most bullish) to 5 (most bearish) based on a number of technical, sentiment and earnings-related factors. ERI is an added benefit for Winning Edge subscribers, as we now send out reports on changes in ERI scores, especially for stocks that became “1s” or “5s.”

Here’s the table for this week. Note that all of these stocks have rebounded quickly, such that most have now overtaken the key moving averages in the table, which are all significantly higher than the Friday closes.

* A penny is expected compared to a loss of 16 cents a year ago.

Let’s focus in on the retail sector. The fundamentals for retail seem to be on the upswing. More jobs (the April jobs report gave us an upside surprise) mean more income and more spending. We learned last week that consumer spending increased 0.6% in March. Same-store sales data from last week also showed gains, although not as strong as some expected. With this week’s government data and earnings to munch on, the market is looking for continued momentum to keep the sector healthy.

The best proxy for the sector is the SPDR S&P Retail ETF (NYSE: XRT), which counts Netflix, Inc. (NASDAQ: NFLX), Family Dollar Stores, Inc. (NYSE: FDO) and O’Reilly Automotive, Inc. (NASDAQ: ORLY) among its top 10 holdings.

The fund was rocked with the overall market, falling as much as 16% from the April high (and all-time high for XRT) to the low on Thursday. But looking at the chart below, the 100-day moving average provided a foundation, as it did in late January and early February. Now the 50-day moving average is coming into play, which could lend a hand.

Right now, a XRT June 42 Call (XRT 100619C00042000) costs about $1.50. A move back to the $45 level, about an 8% increase, could turn this option into a double.

Tell us what you think here.

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