Retail Rally Comes To A Screeching Halt

Toys R Us refuses to die. The hedge funds that own the debt of the bankrupt toy retailer decided to cancel an auction of assets and instead plan to revive the brand and even open new retail outlets. The prospects of another Toys R Us revival could become symbolic: the timing coincided with what looks like a top in retail stocks as represented by the SPDR S&P Retail ETF (XRT).

The SPDR S&P Retail ETF (XRT) lost 3.3% and confirmed a 50DMA breakdown. XRT finished reversing all the gains from its last breakout and now sits at a 2-month low.

XRT fell 3.3% on high trading volume to close at a 2-month low. The move confirmed the previous day’s 50DMA breakdown. The resulting reversal of XRT’s last breakout gives the index a very toppy technical pattern. While XRT is back to the consolidation pattern that preceded the breakout, a test of 200DMA support seems highly likely given the intensity of selling. XRT last closed below its 200DMA last November. A 200DMA breakdown would confirm XRT’s top.

If I were still playing my 2018 retail recovery thesis, I would have just sold everything here to lock in profits. I would next resolve to wait until holiday season headlines picked up steam for deciding next sector-wide moves. For now, I went scrambling for headlines trying to assess whether fundamental events agreed with the bearish technicals. Two other events stand out.

First, Amazon (AMZN) raised its minimum wage to $15/hour and lobbied Congress to raise the national minimum wage from a paltry $7.25/hour. Wall Street hates sharing profits and wage hikes shift a small amount of the loot from shareholders to workers. Moreover, wage increases translate into cost pressures and margin compression – anathema for stock prices.

Second, Stitch Fix (SFIX), an online retailer which sells customized clothing, was absolutely clobbered after its earnings report completely failed to satisfy investors hopped up on high expectations. The stock closed with a 35.2% loss that is still just a 2-month low. SFIX is a surprisingly sizable component of XRT with a 1% share. The largest holding has a 2.1% share (more on that later). I have been fascinated by the SFIX story ever since I heard the CEO tell her story. Now I am even more fascinated given the current volatility and a float which is sold 24% short.