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Why a big Black Friday won’t actually boost retail stocks

Black Friday is here, and shoppers are packing stores with a little more money in their pockets this year.

Both personal income and consumer spending increased 0.2 percent in October. Meanwhile, the Thomson Reuters/University of Michigan measure of consumer sentiment for November is at its highest level since 2007.

These could both point the way to higher sales this holiday season. But according to one market participant, more sales may not translate into higher share prices for retail stocks.

"I do expect consumers to spend more money this season since we do have more discretionary income available," said Erin Gibbs, equity chief investment officer at S&P Capital IQ Global Market Intelligence. "However, because consumers are so price conscious, we see a lot of expectations of massive pressures on margins and, ultimately, pretty measly earnings and net income growth."

"Margins are really forcing [retail] net income down," Gibbs added. "On top of it, I just see a lot of Black Friday sales that have been starting early. We've seen some warnings already about the net income coming in."

In turn, Gibbs doesn't see much upside in the ETF tracking the retail sector, which trades under the ticker symbol XRT.

The ETF trades at 21.6 times expected forward earnings, a premium compared with the S&P 500's price-to-earnings multiple of 16.7 times. What's more, its earnings growth over the next 12 months is forecast to be 7 percent compared with the large-cap index's 8 percent expected growth rate.

"Overall, I would say this is an avoid," Gibbs added. "Don't buy it here. It's trading at a premium. Wait until January."

But the charts tell a different story, according to Steven Pytlar, chief equity strategist at Prime Executions.

Pytlar sees the XRT's outperformance relative to the S&P 500 as one of the reasons to be optimistic about the ETF.

Charting the ratio of the XRT's price to that of the S&P 500 (which shows the relative value of the ETF to the index) over the past nine months, Pytlar sees an important move.

"Recently what we've seen is a resurgence of the XRT," he said. "It started to outperform the S&P 500. … When we see that, it's a positive technical indicator that investors are becoming more interested in the space and capital is flowing in."

Pytlar says that a one-year chart of the XRT by itself corroborates what he's seeing in the relative value chart.

The break above the $88 to $89 resistance level at the start of the month "indicates that whatever reasons investors had for selling there previously has dissipated," he said. "They're willing to accumulate and hold the ETF at a higher level. This is also technically positive and indicates that the ETF is continuing to trend."

And the technician doesn't see the trend waning anytime soon.

"We like to say that the trend is your friend," Pytlar said. "You run it until it tells you to get off. So right now, we remain positive."

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