Is It Time to Get Back Into Retail?

Retail stocks got a strong bump between March and May, while Wall Street pondered the longer-term impact of economic stimulus checks. Then reality set in, with the sector moving sharply lower until last week's broad reversal. While the bounce has been encouraging, does it really signal the end of bad times for America's shopping malls?

First, let's consider the apparent connection between high oil prices and the anxious consumer. It's widely assumed that $4 pump prices will keep a lid on discretionary spending, but there's little hard data to support this theory. Just consider how the European economic engine has thrived for years, despite high energy costs.

Of course, the old country has more folks riding bicycles and trains to work while we Yanks have more folks riding Hummers and Land Rovers. But social habits change, and Americans could eventually get over their gas-induced sticker shock and get on with the business of conspicuous consumption.

A bigger issue for retailers will arise from the ashes of the current real estate mess. For years, we've been incurring all kinds of consumer debt based on our perceived net worth, driven by rising home prices. This wealth effect is now gone, and replaced with a sense of foreboding that baby boomers might have to carry into their senior years.

This is likely to signal a retrenchment that keeps our spending habits in check well into the next decade. The gloom doesn't bode well for the future of high-end consumerism, or retailers that sell jewelry, luxury cars or home theaters. It also raises a stern warning about optional spending practices in general.

Retail HOLDRs

Click here for larger image.

Source: eSignal

Demographics are powerful, but they won't help us trade retailers between now and the holiday season. For that, we need guidance from the patterns or fundamentals. A quick review of the long-term Retail HOLDRs Trust (RTH - commentary - Cramer's Take) chart shows four major lows in the mid-80s since 2004. Last week's reversal at 82.71 could add a fifth low to the series.

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At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

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