Kiss This Retail Bounce Goodbye…

In early September, one of the stock market’s most unexpected comebacks was paving the way for double-digit trading gains.

After suffering a devastating first and second quarter, investors were starting to slowly sneak back to beaten-down retail plays. The SPDR S&P Retail ETF (NYSE:XRT) was quietly outperforming the S&P 500 for the first time in 2017. While the major averages retreated from their highs, retail stocks were one of the market’s lone bright spots.

At the time, we noted that the retail ETF had jumped almost 6% in just two weeks. The S&P 500 was up only 1.5% over the same timeframe.

The retail bounce offered some much-needed relief for an industry on edge. For most of 2017, Amazon has forced a mass evacuation from brick and mortar retail plays. The SPDR S&P Retail ETF was down as much as 13% year-to-date at its August lows while the S&P 500 continues to post new all-time highs.

Last month’s retail comeback was even producing some favorable short-term plays for nimble swing traders. Beleaguered mall anchor Macy’s (NYSE:M) ripped off its August lows, posting gains of more than 15% in a matter of weeks. And the once-trendy Abercrombie & Fitch (NYSE:ANF) exploded off its lows following a brutal summer crash, gaining an impressive 60% by the end of September.

But many of these retail plays are already starting to roll over. While the retail plunge reached extreme levels over the summer, its third-quarter comeback is now in jeopardy as the SPDR S&P Retail ETF started to stumble this week.

XRT’s late September breakout is falling apart. The EFT has dropped nearly 5% over the past four trading days. After an impressive move off its lows to finish off third-quarter trading, XRT is back below critical support and quickly unravelling.

We’re seeing the carnage play out in individual retail names as well. J. Jill Inc. (NASDAQ:JILL) saw its stock cut in half yesterday after management warned the company wouldn’t hit profit targets. The J. Jill fiasco dragged down a handful of other small retailers, including Express (NYSE:EXPR) and Chico’s FAS (NYSE:CHS), which both fell more than 7% on the day.

The great retail unwind has been slow and painful for long term investors. The death of the old-fashioned shopping mall and the rise of Amazon remains an ongoing cultural event. As it continues to shake out, the victims keep piling up.

We’ve remained picky when it comes to putting our trading dollars on these retail comeback plays. There are plenty of “cheap” retail stocks to choose from. But judging by this week’s market action, it’s clear many of these names are cheap for a reason. Not only will they probably keep trending lower, they might not even survive.

That’s also why we didn’t just snag shares of XRT as it began its comeback move. When it comes to trading the brick and mortar retail names, staying selective is key. So far, it’s paid off handsomely.

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning