Trading Nation

Retail ‘hasn’t looked this good in years’ and could head even higher, says technician

A surprising group of stocks is making a comeback. But is it a smart bet?

After years in the discount bin, investors are beginning to treat the retail space like a must-buy again. One technician says the charts show more upside potential ahead.

"Retail hasn't looked this good in years," Ari Wald, head of technical analysis at Oppenheimer, said on CNBC's "Trading Nation" on Monday. "It's looked poorly in recent years so we've had a very easy comp to base that off of."

"After a couple years of underperformance as shown by that falling line, we're starting to see that trend stabilize and turn sideways," Wald continued. "That 200-day moving average is a great proxy for what trend is and you can see that start to slope sideways so we think this is starting to base."

The S&P Retail XRT ETF's 200-day moving average relative to the S&P 500 had been on a downward trend since October 2015 before it began to flatten out and twist higher this year. On an absolute basis, the ETF spiked above its 200-day moving average in November and has held above that level through this year.

"There's some stocks within this group that are positioned to rally and take on a leadership role, some of the stocks within the textile and apparel group, in particular," said Wald.

One name Wald sees taking on that leadership role in the space is Nike.

"The stock has come up into this very important test of $68. This was the peak dating back to late 2015," explained Wald. "It's a pause ahead of the breakout because this consolidation is occurring with a rising trend going into it (that rising 200-day moving average). So add it all up, we see pre-breakout potential for shares of Nike."

Nike has bumped up against its $68 level since February. It currently sits just 1 percent below that mark. It trades 11 percent above a rising 200-day moving average.

Max Wolff, chief economist at The Phoenix Group, also sees gains ahead for the retail space as it benefits from shifts in investor sentiment.

"On a risk-adjusted basis it looked pretty good," Wolff said of the industry group on "Trading Nation" on Monday. "There's a major sector rotation here, and it favors older and beat-up as opposed to the new and the tech names. That has been pretty good for retail."

In the month to date, the XRT ETF has risen 1 percent, around half the gains seen on the S&P 500. Once-hot stocks such as those in the XLK Technology ETF have been passed over in favor of more defensive names such as those in the XRT.

Gains in retail could prove short-lived, though, says Wolff.

"The really good economic times, the tax cuts, the relative animal spirits that popped up recently won't run the course," he said. "By late 2018, we expect this sector to be weak again as the macro economy disappoints into 2019."

Earnings on the XRT ETF should post healthy growth this year, according to analysts surveyed by FactSet. Analysts expect an average 23 percent rise in profit in fiscal 2018, though that should slow to 12 percent growth in 2019 and 11 percent in 2020.