February Could Light a Fire Under Retail Stocks

XRT and KATE could each benefit from bullish seasonal trends and a short-squeeze situation

Feb 1, 2017 at 2:00 PM
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Are retail stocks about to rebound? If past is prologue, the answer is "maybe," according to data compiled by Schaeffer's Quantitative Analyst Chris Prybal. Specifically, he found that the SPDR S&P Retail ETF (XRT) has averaged a 3.4% gain in February since its inception.

If XRT -- last seen 0.6% lower at $42.93 -- stages a bounce this month, there's potential for a short-squeeze rally to catalyze its upside move. In the last two reporting periods, short interest on the exchange-traded fund (ETF) jumped 49% to 33.4 million shares. At XRT's average trading volume, it would take a week to buy back these positions -- plenty of pent-up purchasing power.

That said, a February advance is far from a foregone conclusion. After all, the shares have been in free-fall since their December high at $48.26, tumbling 11%. Moreover, XRT is staring up at historical resistance in the $43-$44 area, also home to the descending 10- and 20-day moving averages. If that's not enough, this zone roughly corresponds with the ETF's 61.8% Fibonacci retracement of its post-election surge, per the chart below:

xrt daily feb 1

One retail stock that could assist XRT in a potential turnaround is buyout target Kate Spade & Co (NYSE:KATE). The shares have historically outperformed in February, with positive returns in nine of the past 10 years -- and an average one-month gain of 12%.

Amid the aforementioned buyout buzz, KATE has outstripped the broader S&P 500 Index (SPX) by 20 percentage points over the previous two months. This, despite the fact short interest jumped 135% in the past two reporting periods. If the stock can keep its upward momentum going, a short-squeeze situation could create additional tailwinds.

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