Retail is at decision point on direction

One sector that is acting contrary to the news is retail. The news I am talking about isn’t in the one on the boob-tube. First lets look at the chart of XRT, SPDR Retail ETF.

XRT

As you can plainly see the break above $64 resistance is still in play along with the longer term uptrend. The last week showed some selling, but investors continue to step in and buy the sector on pullbacks. XLY, SPDR Consumer Discretionary ETF chart looks very similar to the one above, validating the broad sector continues to show upside potential. Thus, technically the charts are positive. The challenge of late has come from the fundamental side of the equation.

What is explanation of the reports that have come from Wal-Mart, Target, Coach, Nordstrom’s and last night JC Penny’s? There have been some short falls on earnings, but the key measure that has hurt those stocks has been the forward guidance. Target stated they saw a tough year ahead for the consumer and lowered their 2013 guidance. That is more than saying we see a tough patch ahead. The pressure from the increased tax from paychecks, higher gasoline prices and food inflation have all impacted the consumer. Thus, the guidance from the retailers has not been overly optimistic. Evidently they didn’t listen to Mr. Bernanke’s speech the last two days on Capital Hill. Maybe they would have been a little more on the positive side. The concern within the sector is ever-present when it comes to consumer spending, but these warnings are something we all have to pay attention to going forward.

On the other side of the coin there are analyst who think that the retailers will still benefit at the lower end of the retail market or discounters. TJX is one we continue hear is cheap, but the chart shows some weakness currently with a move towards the trendline as support. It is one stock to watch in the sector short term, but again it will have to perform to attract buyers. Today Gap, Kohl’s and Sears will report earnings. I don’t expect they will offer any different views of the current state of the consumer.┬áThe key is to be patient, let the story unfold and then chose sides. If we guess, and we are wrong it will cost money. If we are patient and let the trend develop, momentum will be on our side.

The key issue for me, stocks trade looking forward not backwards. If the forward guidance from the retail sector is for slower spending… it may be time to listen. The Chart above shows the 50 day moving average in red. If that line is broken by price and I owned this sector (which I do not), I would be heading for the exits. That break would start to validate for me what the fundamental data is saying currently. However, earnings are for the trailing quarter and that means if the guidance is lower, earnings may very well follow. Caution is advised.

Another form of consumer stocks is the Gambling Sector. This falls into the Liesure and Travel sector, but it is also a good barometer for spending. PEJ, PowerShares Leisure & Entertainment ETF shows a sound uptrend for the sector overall, but is showing some signs of topping along with the broad market indexes. Equally BJK, Market Vectors Gaming ETF has moved higher since the August lows. The consumer is engaged in these companies and the outlook is solid for the trend to continue. This could support the thesis from analyst that the retail sector will see a pick up along with the economy throughout the year.

Watch for support to hold at the up trending lines for the sector and offer opportunities going forward. If the trend is broken… look else where until it is reestablished.