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ETF Update: Is the Retail Sector Ready for Earnings?


Gauging the health of retailing stocks including CVS Caremark, CarMax, and Macy's.

As the rapid onslaught of quarterly reports begins to subside, one group of stocks takes center stage: retailers. Heading into the proverbial back nine of earnings season, the SPDR S&P Retail ETF (NYSEARCA:XRT) is exhibiting healthy price action, and the overall sector may have some additional fuel in the tank, from a contrarian perspective.

According to data culled by Schaeffer's Senior Quantitative Analyst Rocky White, more than four-fifths of stocks in the retail sector are trading atop their 200-day moving averages. Despite this technical prowess, just half of the analysts' ratings across the sector are of the "buy" variety. What's more, on average, retail stocks have more than 11% of their available float sold on the short side, representing fuel for a potential short-covering rally.

The XRT itself -- currently perched at $73.17 -- has gained more than 17% so far in 2013, helped higher by its 40-day moving average. In fact, just last week the shares pegged a new all-time high of $73.74. Panning back, the ETF has been in steady uptrend mode since early 2009, with pullbacks contained by its 10-month and 20-month trendlines.

This positive momentum hasn't gone unnoticed by option players, however. Schaeffer's put/call open interest ratio (SOIR) for the ETF currently stands at an annual low, suggesting the short-term XRT option pits have rarely been so call-heavy. On the plus side for contrarian bulls, the ratio still reads 2.05, with puts more than doubling calls in the front three-months' series. Meanwhile, in the past 50 days on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), 349 puts have been purchased to open on the XRT for every 100 calls. Also, the ETF's Relative Strength Index (RSI) stands at 57, which is far from overbought territory.

Three wide-ranging XRT members that look intriguing in a contrarian light are drugstore mainstay CVS Caremark Corporation (NYSE:CVS), used-car aficionado CarMax, Inc. (NYSE:KMX), and venerable department-store name Macy's, Inc. (NYSE:M). The first two have beat many of their peers to the earnings punch and have already reported, reducing the concern of event-related volatility over the near term.

In addition to visiting the earnings confessional yesterday -- where it topped consensus expectations for earnings per share and revenue -- CVS Caremark also traveled to a new record high of $59.25. Currently hovering close to $58.80, the shares are up nearly 22% in 2013 alone, but could still enjoy some contrarian tailwinds on their way into further uncharted territory. The average 12-month price target of $60.92 is a mere chip-shot away from the stock's current price. Should other brokerage firms follow the lead of Lazard and BMO -- who upped their targets this morning -- CVS Caremark Corporation could enjoy an added boost.

Carmax, Inc. motored to the earnings confessional on April 10, matching estimates and rallying 5.5% over the subsequent three trading days. From a longer-term perspective, KMX has steadily rallied close to 85% from its late-June annual low of $24.83 to its current perch at $45.75. Options players remain skeptical, however, which is an encouraging sign from a contrarian perspective. The stock's SOIR stands at 3.08, indicating that put open interest is more than three times heavier than call open interest for options expiring in three months or less. What's more, this reading has increased sharply from 1.24 on April 9 (just before the company's earnings) and is now just 2 percentage points shy of an annual put-centric peak. This bearish sentiment is also reflected by the stock's ISE/CBOE/PHLX 10-day put/call volume ratio of 8.64, which is higher than 89% of all other readings from the past year. Put simply, KMX option traders have spent the last two weeks buying puts to open at an accelerated clip.

Macy's is tentatively scheduled to report earnings ahead of the open on May 15, and has a strong record heading into the news, having surprised to the upside in each of the past eight quarters. On the charts, M shares have gained almost 15% year-to-date and are currently trading at $44.72, just shy of a six-year high. Macy's, Inc. also boasts a high SOIR -- its ratio of 1.09 ranks in the 83rd annual percentile -- and short interest has been on the rise as well. During the last month, M short interest has ballooned by almost 19%, leaving close to 3% of the equity's float sold short.

As far as the XRT is concerned, it is focused on barreling through its all-time high of $73.74 and exploring uncharted territory, as many of its 97 components take turns issuing their earnings results in the next couple of weeks.

This article by Beth Gaston was originally published on Schaeffer's Investment Research.

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