Why It's Time to Jump on This Retail ETF

XRT is approaching a historically bullish time of year

Managing Editor
Feb 22, 2018 at 8:49 AM
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Retail stocks dipped with the broader equities market earlier this month, and a lackluster earnings showing from Walmart Inc (NYSE:WMT) earlier this week didn't help matters. However, just like now looks like an opportune time to buy the Walmart dip, the SPDR S&P Retail ETF (XRT) could also rebound soon, if history is any indicator. With a slew of the sector's earnings expected next week, we decided to take a closer look at XRT.

XRT touched a two-year high of $49.08 on Jan. 24, before pulling back with the broader stock market. However, the exchange-traded fund (ETF) found support atop its 80-day moving average, in the vicinity of a 50% Fibonacci retracement of its rally from November lows to the aforementioned peak. Shares of the fund closed yesterday at $45.34, and are on the cusp of a historically bullish time of year.

Per data from Schaeffer's Quantitative Analyst Chris Prybal, XRT has averaged a March gain of 4.2% since inception -- its best month of the year. That's followed by an average April gain of 2.8%. From current levels, a 4.2% boost next month would put XRT around $47.24. A subsequent 2.8% burst would have the shares around $48.57 -- back near two-year highs.

A round of solid retail earnings next week could also spook several shorts. On average, 11.2% of retail stocks' float is sold short -- the second-highest of all sectors we track. XRT itself saw short interest grow nearly 36% in the past two reporting periods. It would take these bears about a week to buy back their positions, at the fund's average daily trading volume. That's plenty of fuel for a short squeeze to propel XRT higher.

Echoing this, the ETF's Schaeffer's put/call open interest ratio (SOIR) of 2.12 ranks higher than 82% of all other readings from the past year. This indicates that near-term speculators have rarely been more put-biased during the past 12 months.

 

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