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The Time to Buy Retail for Christmas Was Halloween


I thought a rally was supposed to be a good thing?


As retailers begin to get a better sense of what holiday sales are going to look like, it's a good time to revisit a chart I showed on October 21st regarding the underlying breadth of the Consumer Discretionary sector.

At the time, it was clear that the group was washed out and at a point from which previous rallies had begun. That proved to be so this time around as well, as the XLY exchange-traded fund is about 6.5% higher now than it was then.

With the rally, one could make the argument that all the pessimism that was so evident in October has perhaps dissipated, with investors looking forward to a positive holiday season. Let's take a look at the chart and see if we can get any clues:

The underlying stocks in the index are certainly in a different place now, which is to be expected with such a rally. The McClellan Summation index has climbed back to the upper end of its range, and now more than 80% of components in the fund are trading above their 50-day averages - a place where previous rallies have at least temporarily stalled.

In October, we saw 15% of component stocks hit a new low. Now we're seeing only a couple (if any) hit new lows on a daily basis while a few are even hitting new 52-week highs.

I didn't show short interest on this chart, as it only updates monthly. It did decrease a bit in November from its previous high in October, but we'll get a better sense when December's numbers are released.

The Rydex Retailing fund has seen its assets about double from that October low. Historically the level of assets is still relatively low, but it's safe to say that traders have begun to take notice of the rally.

Overall, the risk/reward in the group has shifted substantially from where it was in October, and what was once a washed-out sector has regained its footing. It's not at a point that I would consider it over-owned, but as far as adding new positions, the risk is considerably higher now.

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No positions in stocks mentioned.

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