Retail Stocks: More Nice Than Naughty

Retail stocks held up better than the broad market in the last downdraft, putting the sector into a great position to resume its eight-month recovery. But careful stock-picking will be required to benefit from the next leg up, because heavy data flow from now into the holiday season will dictate the group's winners and losers.

The Retail HOLDRs Trust (RTH Quote) closed at a 13-month high on Monday after bouncing just above support at the 50-day moving average last week. Volume on this uptick has been unusually low, suggesting a period of consolidation near the October high before the fund enters a sustained uptick that tests round-number resistance at $100.

Retail HOLDRS (RTH) -- Monthly eSignal

That's a critical price zone, as you can see on the long-term chart above. The fund has rallied into triple digits at least five times since 2002 and has been rejected on every advance. The June 2007 high at $108.73 remains the high-water mark, and it's unlikely the current uptrend will exceed that level unless the economic outlook brightens considerably and cash register sales return to pre-meltdown levels.

With unemployment levels in double digits and rising, I don't think that will happen. It's no secret the "new normal" has been driving the sector higher; retail stocks have been lifting because they're beating limp 2008 comparisons. At some point, however, absolute sales will take over as the litmus test for higher prices. While a few retail leaders might stand up to that challenge, most will not.