Why this could be a cruel Christmas for retailers

The start of the holiday shopping season is just a few days away. But that doesn't mean investors should add retailer stocks to their wish list.

Major stores like Wal-Mart, Target, and Best Buy [cut] already have announced big deals to entice customers to walk through their doors and shop. Yet when it comes to retail stocks, investors haven't been buying them--at least compared with other sectors of the market.

Compared with the S&P 500, the ETF tracking retailers (trading under the symbol RTH) has underperformed over the past year. While the broad market index is up 13.8 percent, the RTH is up just 9.6 percent.

(Watch: Black Friday deals debunked)

So can investors expect a jolly rally between now and the end of the season for the RTH?

Actually, there are fundamental and technical reasons to believe that it will continue to be rough sledding for the group, at least in the short-term.

Erin Gibbs, equity chief investment officer at S&P Capital IQ Global Markets Intelligence, believes that the valuations of retail stocks are already extended.

"Currently it's trading at about 26 times forward earnings," she said. "That's a little bit high for me, especially considering the S&P [500] is trading at about 16 times forward earnings."

Examining the stocks that make up the RTH, Gibbs sees precious little upside.

Company

% of RTH total assets

Wal-Mart

10.19

Amazon

8.43

Home Depot

8.04

CVS

7.78

Lowe's

5.25

"I say sell," Gibbs said. "This is its peak. There are certainly better opportunities going forward in the next 12 months, even just buying an S&P 500 ETF. Invest in the broader market rather than this particular industry."

On the technical side, Steven Pytlar of Prime Executions is a bit more optimistic. He says the RTH is trading along an uptrend that's been in place since the beginning of the year. That uptrend recently converged with resistance at the $61 level.

(Watch: Wal-Mart's new Black Friday tactic)

"That's indicative of accumulation and then ultimately a breakthrough of that resistance level around $61," he said.

However, he is wary about RTH in the short-term.

"The reason it's not positive in the near term is the technical projection of that prior price structure has been met at about $66 to $67, its current levels," Pytlar said. "That's a warning we should look for profit-taking. We should look for a technical reversal and a phase of consolidation."

But once the ETF goes back down to its support level, Pytlar sees it resuming its uptrend. "In the near term, definitely we'd be cautious, neutral on this," he concluded. "Longer term, technically at least, we're not seeing any reason yet to sell this. And in fact, we'd still be positive."

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