Trading Nation

The retail resurgence this year is deceptive, warns market watcher

Trading Nation: Retail's big run

Retail is the top industry performer on the S&P 500 so far this year. But, one market watcher calls the retail comeback story misleading.

"The [retail] story is a little deceptive," Boris Schlossberg, managing director of FX strategy at BK Asset Management, told CNBC's "Trading Nation" on Wednesday. "It's really not a story of brick-and-mortar comeback."

Retail's big rise this year does not necessarily mean consumers are flocking to the mall. Other names in the space — such as Amazon, TripAdvisor and Netflix — have far more to do with the industry's resurgence this year, he says.

"It's much more a story of new retail really outperforming tremendously," added Schlossberg.

The S&P 500's retail industry group, housed inside its consumer discretionary sector, has climbed 15 percent in the year to date, outpacing the S&P 500's 2 percent rise. Netflix is the best performer of the group, having increased 65 percent. Amazon and TripAdvisor are the next best with a 32 percent and 23 percent gain, respectively.

Those three carry the majority of year-to-date gains. Of the 29 names in the industry group, three-fifths are negative for the year.

A mix of brick-and-mortar retailers weighed on the XRT Retail ETF as well. Some of the industry's best-known names — including Walmart, Foot Locker and Office Depot — are negative for the year, while just 40 percent of the ETF is positive. The XRT ETF is up 0.8 percent in the year to date.

It's not all about the new retail names, though. There are some legacy retail names that could make a comeback, according to Larry McDonald, editor of The Bear Traps Report.

"The best risk-reward is actually in the homebuilding side and really home improvement retailers," McDonald said during the same "Trading Nation" appearance.

Those retailers could benefit from financial regulatory rollbacks making their way through the Senate. The Senate is preparing to vote this week on changes to the Dodd-Frank Act, legislation passed after the 2008 financial crisis. Dodd-Frank regulations were designed to ensure banks could weather any future crises.

The passage of that legislation would ease the regulatory burden on smaller banks across the country, which could expand lending capacity and boost activity in the homebuilding and real estate space, says McDonald.

"This is historic, and you want to get long the XHB retailers in the homebuilding space," he said.

The S&P Homebuilders XHB ETF was hit hard by volatility in February. The ETF declined by more than 9 percent that month but has clawed back 1.5 percent in March so far. For the year, the ETF has fallen 7 percent. Major home-improvement retailers Home Depot and Lowe's are both negative for 2018.