Trading Nation

Retail attempts another recovery, but this one looks a little different, trader says

A retail resurgence is in the works, and Walmart is one name to buy

Retail has stanched the bleeding and is trying for a full recovery. This time it could succeed, argues one trader.

The "XRT has actually been here before, but there are a few things going on that I think give it a better shot getting to all-time highs," Frank Cappelleri, senior equity trader at Instinet, said Monday on CNBC's "Trading Nation."

Its performance over the past year makes Cappelleri optimistic about a breakout in 2018. The XRT retail ETF was able to "hold things together" in 2017 even as analysts bemoaned sounds of retail's death rattle, he says.

"You heard a lot about the potential for retail to go down," he said. "Amazon was taking over the world, death of retail, so forth and so on. But what happened was we were able to hold, and so right here, to me, is a very long high-level consolidation pattern."

The XRT ETF added 2.5 percent in 2017, a fraction of the S&P 500's nearly 20 percent rise. However, its gains accelerated from 2016 and clawed back some of the losses suffered in 2015's sell-off.

Retail's recent outperformance also has Cappelleri feeling confident in a stronger push higher.

"From last fall to now, the XRT has been outperforming the S&P 500 and we're getting kind of close to pushing above this level on a relative basis," he explained. "The XRT, on this daily perspective, is now forming a potential inverse head-and-shoulders pattern as well, which obviously push-through would get us to all-time highs."

An inverse head-and-shoulder pattern forms when a security's price hits a low followed by a rebound, then a lower low and a rebound, and a final higher low and bounce. The pattern suggests a forming bullish trend. Cappelleri identifies a low on the XRT ETF in early March, a year-to-date low in early April and a final low later that month.

The ETF hit an all-time high of $51.25 back in March 2015, a level it tried but failed to recapture during January rallies. It currently trades under 13 percent from those records.

To Larry McDonald, editor of the Bear Traps Report, there is one corner in the space set to benefit the most from a retail resurgence: Walmart and its peers.

"Every single time we've had a late-cycle development in the markets where tech starts really taking off in that late, late cycle, that's when you see a rotation into the Walmarts, into what's called the XLP, which are the consumer staples names," McDonald said Monday on "Trading Nation."

The consumer staples sector is the worst S&P 500 performer of the year, while the information technology sector is the best. The XLP consumer staples ETF has dropped nearly 14 percent so far in 2018.

"You're going to see very shortly here in the next six months a rotation out of big tech, and that money's going to move toward consumer staples, the Walmarts of the world and retail," said McDonald.

The XLP ETF is down more than 2 percent in May, setting up for its fourth straight month in the red.