The Stock
SPDR S&P Retail ETF (XRT-N)
Recent price $39.79
Trend
Last week's stock market volatility cut a wide swath, hobbling shares big and small as the number of stocks dropping below their trend line spiked.
Over 1,400 NYSE stocks changed from Stock Trends Bullish to Stock Trends Weak Bullish amid the fray, with Weak Bullish stocks now accounting for 41 per cent of stocks trading on the Big Board, up from 5 per cent the previous week. Most benchmark indexes also turned Weak Bullish, the first taste of this shifting trend since the beginning of February when the market experienced a setback. A correction is clearly in the works again as the S&P 500 index closed the week 9 per cent below its high of late April.
Hit hardest last week were small-capitalization stocks - the Russell 2000 index is now 12 per cent below its April 26 high. But divergence from a bullish trend in the consumer cyclical, industrial and transportation sectors might hold the best opportunity for short-term traders looking for a rebound. Last week's precipitous fall dropped these sector indexes to their 13-week moving average trend lines, but all remain at least 10 per cent above their level of three months ago, handily outperforming the broad U.S. stock market.
Investors willing to stand up to the bearish turn in the stock market believe the global economic recovery has some legs, and that the U.S. consumer is slowly regaining confidence. For that reason, the performance of retail stocks is an important entry on the tip sheet of investors.
Despite continued high unemployment and consumer debt concerns, the market has been giving a nod to recovery, with bullish-trending retail stocks outpacing the S&P 500 for most of the past year and a half. Bullish investors undeterred by stock market jitters about sovereign debt problems in Europe will be interested in buying the pullback of retail stocks.
The Trade
The SPDR S&P Retail exchange-traded fund traded heavily last week - double its weekly average and its most active trading sessions ever. The fund dropped 7 per cent, just slightly more than the S&P 500 index. Retail apparel stocks account for 32 per cent of holdings, representing the largest weighting in the fund. The next largest weighting is in specialty retail and automotive stocks, both of which account for less than half the apparel stocks - so the clothing retailers' relative strength is an important indicator of the fund's resilience at the trend line.
Many of these stocks remain above trend, outpacing the market handily over the last three months. Stocks of retailers Jos. A. Bank Clothiers Inc. , Ann Taylor Stores Corp. , Limited Brands Inc. , and Nordstrom Inc. are leaders, with some reporting better-than-expected April sales. Bullish traders should be in line to pick up this fund.
The Upside
The fund closed the week slightly below its 13-week moving average trend line, currently marked at the $40.50 level. A 10- to 15-per-cent rebound back to the April peak would be a short-term objective if the European debt crisis subsides and investors return their focus to elements of recovery in the U.S. economy.
The Downside
Unfortunately, the stock market could be in store for a rough period. Investors going long here can spare an 8-per-cent drop to the primary long-term trend line. Check out of SPDR S&P Retail ETF at $36.
Skot Kortje has been analyzing stock market trends for 15 years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995. For more go to Stocktrends.ca.