XRT Could Be Due for a Short-Term Bounce

It's been a rough start to 2017 for retail stocks, as evidenced by a nearly 4% year-to-date deficit for the SPDR S&P Retail ETF (XRT). What's more, according to BofA-Merrill Lynch, consumer discretionary stocks last week saw the largest outflows since the data first started being collected in 2008, with the brokerage firm citing weak earnings and guidance across the sector for the influx of selling. Against this backdrop, retail shares are oversold, and given the low expectations levied toward XRT, which is currently trading up 0.2% at $42.42 amid seasonal tailwinds, the sector could be due for a short-term pop. 

XRT Bounces Off Familiar Technical Support

Taking a closer look at XRT's technical backdrop shows the retail exchange-traded fund (ETF) breached its lower Bollinger Bank in late January -- which has served as a reliable "buy" signal for S&P 500 Index (SPX) stocks in recent years, according to Schaeffer's Senior Quantitative Analyst Rocky White. The shares quickly bounced off the $42 region, home to peak levels of put open interest in the February and March series, with more than 43,500 contracts collectively outstanding. This could continue to buoy XRT shares in the near term, as the hedges related to these bets unwind.

Additionally, the retail sector is highly shorted, with short interest on XRT up 49% in the two most recent reporting periods. It would take short sellers nearly a week to cover these bearish bets -- at the SPDR S&P Retail ETF's average pace of trading -- meaning there's ample sideline cash available to help fuel any additional bounces off familiar support.

Sears Holdings and Target Shares Reach Oversold Territory

Drilling down, retailers Sears Holdings Corp (NASDAQ:SHLD) and Target Corporation (NYSE:TGT) are two XRT components that recently broke below their lower Bollinger Bands, suggesting they are oversold. This theory is echoed in both stocks' 14-day Relative Strength Indexes (RSI), which closed last night at 27. What's more, both SHLD and TGT have similar sentiment backdrops to XRT.

In the options pits, SHLD's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) is docked at a top-heavy 2.39, while TGT's reading arrives at 1.67. Simply stated, near-the-money puts outweigh calls in the standard February series, which expires at next Friday's close. Elsewhere, both stocks are heavily shorted, with SHLD sporting a short interest ratio (SIR) of 7.1, while TGT's SIR is docked at a lofty 7.9.

Nevertheless, Sears Holdings Corp and Target Corporation provide an important lesson on combining sentiment and technical analysis to get the full picture. Specifically, SHLD and TGT are long-term laggards on the chart. While SHLD took a slight bounce after breaching its lower Bollinger Band yesterday, the shares were last seen trading down 0.7% at $5.62 -- fresh off a record low of $5.50 -- bringing their 52-week deficit to 63%. TGT, meanwhile, moved back above its lower Bollinger Band in late January, but has since been stuck in a tight trading range between $63 and $64, near its Jan. 27 two-year low of $62.94. Today, the stock is up 0.7% at $64.03.

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