Could the selling on Tuesday be the best thing to happen to some of the stock market’s
strongest stocks?
Heading into Tuesday’s session, consumer based sectors were among the most short-term
overbought . Whether you were looking at defensive, consumer staples stocks via the Consumer
Staples Select Sector SPDRS ETF (NYSE: XLP) or growth-oriented, employoment and credit-
sensitive stocks by way of the Consumer Discretionary Select Sector SPDRS ETF (NYSE: XLY) and
the S&P 500 Retail SPDRS ETF (NYSE: XRT) – new, 52-week highs were the norm.
What is especially interesting about the strength and overbought conditions of the XRT is the
fact that the fund is equally-weighted among a number of retailers, with everything from “star” stocks like
Netflix (NASDAQ: NFLX) to “forgotten-but-not-gone” names like Winn-Dixie (NASDAQ: WINN) sharing common billing. Given how overbought XRT is, compared to the no-less-overbought Market Vectors Retail ETF (NYSE: RTH) which is top-heavy with Walmart
Stores (NYSE: WMT), Home Depot (NYSE: HD), and Amazon.com (NASDAQ: AMZN), the fund is a true testament to the breadth of the strength behind the consumer buying power right now – and its affect on stocks.
One key question, then, is this: do overbought conditions in consumer stocks – and consumer stock exchange-traded funds like
those in this report – merit short-selling? From our perspective, short-selling may ultimately be less worthwhile than waiting for the opportunity to trade the ETFs from the long side again.
Why? For all their recent gains and short-term
overbought status, none of these ETFs have earned “consider avoiding” ratings or negative,
short-term edges. And this, combined with the fact that the XRT, XLP and XLY are all trading in
bull market territory above their 200-day moving averages suggests that traders and
active investors may want to wait to bid on the next significant pullback rather than trying to
time the moment when buyers finally say when.
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David Penn is Editor in Chief of TradingMarkets.com