Has Retail Run Out of Steam?

The oversold close in ^M^ earlier this week continues to be the catalyst driving the stock higher. The stock is up more than 2% on Thursday, following through to the upside for a second day in a row.

Although lifted from oversold territory by the strength of stocks like Macy’s that continue to trade above their 200-day moving averages, the retail sector still is closer to short-term lows than short-term highs. This means traders should not be surprised if any renewed weakness is swiftly met by another round of buying. At these levels, traders have been more likely to buy than to sell, historically speaking, even with sector ETFs oscillating around their 200-day.

The ^XRT^, for example, bounced by just over half a percent after a three-day pullback. But the relative weakness of the move higher means that XRT finished very much near technically oversold territory. The same is true for the ^RTH^, which was up half a percent, but finished at session lows on Thursday.

This weakness has given both ETFs short-term, “consider buying” ratings of 8 out of 10. And while conservative traders and investors may want to wait for even higher ratings with a greater historical likelihood of short term outperformance, the current ratings represent a signficant positive edge relative to the overall market (the SPY, by comparison, has neutral ratings of 5 out of 10 ahead of Friday’s open).

Note also that basis their ETFs, retail is higher rated in the short-term than the broader category of consumer discretionary. While XRT and RTH have earned ratings of 8 out of 10, the ^XLY^ is on pace to open Friday morning with neutral ratings of 5 out of 10.

Traders looking for potential edges in the component stocks of these funds may want to keep an eye on 8-rated ^LTD^, down six days in a row and lower by more than 2% on Thursday, and 7-rated ^COST^. Shares of COST have finished down for seven consecutive trading days ahead of Friday’s open.

All of the stocks and ETFs in today’s report were available from research and data available through PowerRatings. To learn more, click here.

David Penn is Editor in Chief of TradingMarkets.com