The retail sector appears to be in trouble. What does this mean for investors, and what moves can traders make to minimize any potential damage?
What are the negative factors affecting retail? Inflation tops the list. Despite a series of rate hikes from the U.S. Federal Reserve, prices continue to rise. The consumer price index is rising at a 4.9% annual rate, and the core personal consumption expenditure index, the Fed's favored inflation measure, is climbing at 4.7%.
Faced with higher prices, consumers are loading up on credit card debt. According to the St. Louis Fed, Americans now owe just under $1 trillion in credit card and other revolving credit plans.
According to a study by Wallethub, the average household's credit card balance is about $10,000. A study be Forbes places the average rate on credit card debt at 24.14%. Assuming a credit card balance of $10,000, this equates to about $200 in interest charges per month.
Something's got to give, but when? U.S. retail sales came up short of expectations in April, but did manage to rise by 0.4% from the previous month.
While consumers aren't hitting the brakes on spending, they may do so in the near future. Charts are hinting that some stocks in the retail sector could soon decline.
The S&P Retail SPDR exchange-traded fund (XRT) , a proxy for the retail sector, is in a precarious position. The weekly chart of XRT shows it closing in on major support at $56.44 (black dotted line). A weekly close below that figure places XRT at a two-year low.
Charts by TradeStation
While XRT is on the verge of a breakdown, some stocks have already broken support. Target (TGT) recently broke down from a large descending triangle pattern (black lines), and is trading at multi-year lows.
Where should retail investors put their money? We could see capital gravitate toward a handful of big names, as has already happened in tech. I'm looking at the world's biggest retailer, Walmart (WMT) and the world's biggest online retailer, Amazon (AMZN) .
Walmart has been in a bullish trend for about a year, and is climbing within an ascending triangle (black dotted lines). This bullish pattern projects the stock to the $170 area.
Amazon is finally showing signs of life. The stock's 50-day moving average (blue) recently crossed above its 200-day moving average (red) for the first time in over a year. Shares of Amazon have climbed 43% this year, and closed at a six-month high earlier this week.
Will consumers continue to spend? The biggest threat to consumer spending would be a recession, and the unemployment that could accompany it. I'm keeping a close eye on employment data, particularly this Friday's non-farm payroll figure, to help gauge future strength or weakness in retail.
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