Specialty retailers surge, and two stocks could bounce even higher on earnings

Retail is sizzling this summer.

The S&P 500 industry group is one of the best performers over the past three months, with the XRT retail ETF tracking for its best month since last November.

The tail end of the earnings season could give the group even more upward momentum with specialty store stocks such as Abercrombie & Fitch, Lululemon, Dick's Sporting Goods and Dollar General set to report next week.

"Lululemon is the clear standout among this group," Mark Newton, technical analyst at Newton Advisors, said Thursday on CNBC's "Trading Nation." "This stock had been consolidating in nearly a six-year consolidation up until this past March. It broke out above $82 and that's really given it a lot of upside acceleration."

After sticking close to $80 through most of the first quarter, better-than-expected earnings in late March drove Lululemon sharply higher. Since then, its shares have surged 75 percent. It hit an all-time high Friday.

Lululemon's recent rally also has pushed it into overbought territory. Its relative strength index, a momentum indicator, has a reading of more than 80. A level above 70 typically indicates overbought conditions.

"It has gotten overbought but yet technically it is the true standout. I don't see any real near-term evidence of this name peaking out," said Newton. "I expect upside, potentially to $145-$150 and really on any pullback you'd really still want to be a buyer of this name."

A stock price of $145 represents another 5 percent rally from current levels and a record.

Lululemon looks strong to Mark Tepper, president of Strategic Wealth Partners, but he finds Dick's Sporting Goods as the more favorable stock in the group reporting next week.

"They're executing really well on their merchandising strategies and that's helping them to realize much higher margins," Tepper said Thursday on "Trading Nation." "They're also doing a good job on the digital end as well."

Dick's has a gross margin of 29 percent, slightly higher than the 26 percent average on the XRT ETF. In its most recent earnings report released in May, the sports apparel retailer posted a 24 percent increase in e-commerce sales.

Dick's reports before the bell Wednesday, and Lululemon is scheduled for after the bell Thursday.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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