It’s Really All About the Retail Sector Now

September 5, 2023

Mish's Daily

By Mish Schneider

This entire year, retail as measured by the ETF XRT or the Granny of the Economic Modern Family has underperformed the SPY and QQQs.

Encumbered by higher interest rates, higher oil prices, higher inflation, higher insurance costs and a burgeoning credit card debt, we have wondered many times this year if Granny can keep up.

Yet, each time we think Granny, or the consumer is done, buying has come in to save that sector from becoming a longer-lasting ball and chain.

Examining the ETF, the top sector with 92.52% of the holdings is in Retail Trade.

Consumer services, non-durables, and distribution services have a much smaller weight.

Really interesting is that Carvana is now the top stock holding at 3.49% with:

Abercrombie & Fitch Co. Class A 2.07%
American Eagle Outfitters, Inc. 1.89%
Hibbett Inc 1.68%
Boot Barn Holdings, Inc. 1.67%
Signet Jewelers Limited 1.66%
Ollie's Bargain Outlet Holdings Inc 1.64%
Lithia Motors, Inc. 1.60%
Kohl's Corporation 1.60%
Gap, Inc. 1.59%

The top 10.

XRT also holds Ulta, Target, Kroger, Etsy, Nordstrom, GameStop and Walmart.

That puts the major thrust of the sector into staples with some consumer discretionary exposure.

We like that as it represents the major shopping habits of Americans or 68% of the GDP.

One could argue that despite the headwinds, the consumer is holding up.

And one could also argue that while true, for how long can that go on?

The definition of recession is 2 quarters of declining GDP. Although we had that in the spring 2022, the US quickly came out of it by fall 2022.

Currently, our GDP is 2.39.

What is great about chart reading is that we can gauge the GDP based on XRTs performance ahead of the quarterly (and often revised) numbers the government releases.

The XRT chart right now has a few key aspects based on our MarketGauge proprietary indicators.

The Phase-with the return under the 200-DMA (green) while the 50 DMA is above (blue) the phase is distribution.
Fast MA-with today’s action, XRT is holding the 10-DMA (pink)
Calendar Ranges-XRT could not clear above the July 76-month calendar range high (horizontal green line). However, it is holding the July 6-month calendar range low (red line).
Real Motion-XRT’s momentum is weakening after the mean reversion buy signal at the end of August.
Leadership- XRT has underperformed the SPY since early August and continues to weaken against the benchmark.

Put this all together and we have some key areas holding that need to continue to hold.

We also have some palpable resistance that until clears, means we cannot expect to see a lot of growth in the economy as measured by the consumer.

Should XRT break the July calendar range low, we will once again be talking about the 80-month moving average or the 6–7-year business cycle low.

For now, we are cautious and thinking that the damage from the rapid acceleration of rates and that that acceleration of rates did not help food or energy cost s go down, recession is still very much on the table.

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