Happy New Year! This year the government made a resolution to take more out of your check and consequently you are now making less money per year. I am sure you have noticed by now that your paycheck just got a little smaller courtesy of the increase of the social security tax. Now I am not saying that I agree or disagree with the tax increase, I am sure that our elected officials did what was best. All I am saying is that me, you and everyone else is now taking home less money per paycheck.
Given this information one question comes to my mind, why are analysts so bullish on the retail sector? It seems everywhere you turn there is someone on CNBC talking about retail and how high the retail sector can go. Call me crazy, but in November weren’t we talking about how slow Black Friday was for brick and mortar stores, and how disappointing Cyber Monday was? Oh that’s right; we blamed that on the fiscal cliff and economic fears.
Just like every investor, I watch headlines, look at numbers, and hope for the best; and if you look at the retail numbers that were released today, the economy looks to be spending more and the retail sector looks to be poised for a breakout.
The Commerce Department reported retail sales increased 0.5 percent after an upwardly revised 0.4 percent rise in November. Sales in November were previously reported to have gained 0.3 percent.
Economists polled by Reuters had expected sales to rise only 0.2 percent. Sales were up 4.7 percent from December 2011 and rose 5.2 percent for the whole of 2012.
Allow me to make my bearish argument. Do not forget, these numbers were for 2012. In 2013 we are all now making less money. So does this mean the typical consumer will start spending less and showing more discretion? One argument that retail bulls make is that the growth of the economy will be enough to sustain any decrease in spending that occurs. Call me crazy but I have not heard a single economist say that we will have greater than a 2 percent GDP growth this year. I also heard Ben Bernanke say that he will continue quantitative easing until the unemployment rate falls below 6.5 percent, and oh yea…..wait for it……. Wait for for it……. That should happen sometime around mid 2015.
Please don’t get me wrong. I love Big Ben!! Bring on the QE! But I interpret that as slow, but steady growth. So the question remains - will taking money out of a slow growing economy result in less spending? I would be curious to see if the consumer credit card balances report for December rises. November saw a rise of 7 percent. If December rises higher, then I would start to get concerned that balances are higher and income is lower, which could result in less spending. I think that it is really too early to answer the question of what impact it will have on spending, but as you will see by my trade below, I am neutral to slightly bearish on the retail sector and cautiously waiting until we see a few months of positive retail sales.
There are two fantastic consumer based ETFs that can be affordable to buy and they both offer options.
XLY – SPDR Sector Consumer Discretionary, average volume 5,940,698
The XLY is focused on consumer discretionary stocks but this encompasses a wide range of stocks. The industries that the XLY has holdings in retail, media, hotels, restaurants, household durables, apparel & luxury good, autos, and 6 others.
XRT – SPDR S&P Retail, average volume 4,166,971
The XRT tracks and performs to the Retail index which is an equal weighted market cap index.
The breakdown of holdings for the XRT is 75 percent consumer cyclical, 21 percent consumer defensive and 2 percent technology.
As you can see from the charts below, both the XLY and the XRT have had awesome runs to date but there is one significant point to make. If you look at the RSI both ETFs are very close to reaching the overbought territory. The last time both crossed into overbought territory was last September, and well as you can see buy the charts it was good to sell.
After seeing the XRT run up today over a buck, I couldn’t resist the temptation to short it. I played the Feb 16 64/63 put spread for 42 cents. If the stock drops to levels prior to today then I profit.
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