Data from the U.S. Commerce Department show retail sales were virtually unchanged in July compared with the previous month. And although sales were up 3.7 percent from the year prior, that's below the 4 percent rise logged in every month from March to June.
What's more, in Wal-Mart's Thursday earnings release, the world's largest retailer forecast yet another quarter of flat comparative store sales growth for the three months ending in October.
According to David Seaburg, head of equity sales trading, retail sales are stagnating because incomes are flattish despite lower unemployment numbers. Data from the Bureau of Labor Statistics show that average hourly earnings have grown just 1 percent since the start of the year.
"There's been a tremendous amount of concern about the makeup of jobs, and I think that's going to linger for some time," Seaburg said. "The jobs that have been created in this economy [have] been mostly lower-paying – not even mid-tier-paying – jobs. That's going to have a massive impact on discretionary income. So I think the group is going to struggle."
Seaburg doesn't anticipate much from retailers in the current quarter. "We're right in the middle of the back-to-school season, and there hasn't been a tremendous amount of buzz," he said. "A lot of these retailers are not expecting to be a very strong season. I think it's going to take a little bit further out in the [year], probably towards Christmastime, before we start to see any sort of pick up—if we do at all."
Ari Wald, head of technical analysis at Oppenheimer & Co. agrees with Seaburg's long-term prognosis. But in the short-run, he sees an opportunity to buy the ETF that tracks the retail sector (which trades under the ticker symbol XRT).
"I can't get behind this as a long-term investment," Wald said. "But for a trade, I think they're so beaten up, I think they can start to perform a little bit better in the near term."
Wald recommends that investors look at sector ETFs such as the XRT on a relative basis to broader market. That is done by dividing the prices of the ETF by the S&P 500 and charting the result.
"This helps me answer the question: 'What would I rather buy—this or the S&P 500?'" said Wald. "For right now, I'd rather buy the XRT."
By comparing the relative strength of the XRT to a momentum indicator, Wald constructs a bullish case.
"What I like about it is that its relative price hit a new low but its momentum made a higher low," Wald said. "This is what's called a 'positive divergence.' It's an indication that selling intensity is becoming less bad. And it typically occurs at a turning point."
But that shouldn't be confused with a long-term bullish view.
"I think XRT could play a little bit of catch-up," Wald said. "But the longer-term trend is my concern. I think this is more of a trade rather than a new long-term uptrend starting."
To see the full discussion on retail and the XRT, with Seaburg on the fundamentals and Wald on the technicals, watch the above video.