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Dissecting the Sectors: Retail, Homebuilding, and Tech

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Sector: Leisure/Retail
Bullish

Outlook:
Retail sales rose 1.1% in September to a seasonally adjusted $412.94 billion, said the Commerce Department, besting the average estimate for a gain of 0.7%. This marked the third consecutive month of higher consumer spending, which should bode well for discretionary stocks. On the charts, the SPDR S&P Retail ETF (NYSEARCA:XRT) has lately found support in the $62 area, site of the security's March/May highs. The next technical hurdle for XRT -- beyond its annual high at $65.47 -- could come around $67.50. This is roughly 50% above the key $45 mark, which acted as a ceiling in June 2007 and April 2010, before providing support in August/October 2011. On the options front, we are seeing huge put open interest in the November series for XRT -- which suggests long players in the sector are hedged via the ETF, and could mean limited downside on pullbacks. Among specific equities, we recommend sticking with names that have enjoyed positive reactions to earnings amid a sentiment backdrop of lingering skepticism. One example is Yum Brands (NYSE:YUM), which saw heavy put buying ahead of its well-received quarterly report. Conversely, give a wide berth to stocks like Chipotle Mexican Grill (NYSE:CMG) -- a pre-earnings favorite among call players, right before the burrito chain's lackluster quarterly figures sent the shares spiraling lower.

Sector: Homebuilding
Bullish


Outlook: We continue to see evidence that the housing sector is in recovery mode. The latest batch of data showed a surprisingly strong surge in housing starts, coupled with an impressive 11.3% annual jump in existing home prices. In fact, the National Association of Realtors (NAR) observed last week that the primary deterrent for many home buyers, at this point, is actually an "inventory shortage." Plus, the Fed's plan to buy mortgage-backed securities as part of its QE3 endeavor is even more bullish for homebuilders. Despite the improving fundamentals, some sell-side analysts are getting nervous. Since late September, Barclays, Susquehanna, and MKM Partners have all downgraded the housing sector, and hedge fund manager Whitney Tilson is now said to be betting against the group. This downbeat backdrop is encouraging for contrarian investors, as it sets the stage for positive momentum on any good news, and underscores our theory that the euphoria evident at tops isn't yet in place for this group. Some of our preferred names include KB Home (NYSE:KBH), PulteGroup (NYSE:PHM), D.R. Horton (NYSE:DHI), Toll Brothers (NYSE:TOL), Lennar (NYSE:LEN), and Meritage Homes (NYSE:MTH), due to a combination of solid price action and persistent skepticism from Wall Street. That said, the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) is currently battling congestion around the $26 level, which roughly coincides with a 50% year-to-date return for the fund. In light of that fact, a prudent options strategy would be to sell put premium, and/or buy enough time to allow for a call trade to play out.

Sector: Tech
Bearish


Outlook: It's been a blisteringly bad start to the earnings season for tech stocks, with Wall Street responding negatively to the latest quarterly results from IBM (NYSE:IBM), Intel (NASDAQ:INTC), and -- in case you hadn't heard -- Google (NASDAQ:GOOG). What's more, sector heavyweight Apple (NASDAQ:AAPL) has now burned off nearly 100 points from its iPhone 5-inspired highs of late September. On the options front, the 50-day buy-to-open put/call volume ratio for the PowerShares QQQ Trust (NASDAQ:QQQ) has been free-falling. This metric last checked in at 1.48, which is the lowest level since January 25. Previously, similar downturns in this ratio have coincided with poor price action for the tech-rich QQQ. That said, one risk to the bearish case is QQQ's 160-day moving average, which acted as support from May through July.

This article by Schaeffer's Editorial Staff was originally published on Schaeffer's Investment Research.

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Twitter: @schaeffers
No positions in stocks mentioned.
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