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Retail Stocks Break Out Ahead of Retail Sales

David Becker
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While stocks notched up all-time highs this week, Wednesday’s price action put investors on noticed that equity trading is not a one-way street. Stocks retreated on Wednesday, but momentum continues to be strong in many sectors including retail and construction. Retail sales will headline economic data out of the US on Thursday, with a robust rise expected by economists.

Strong auto sales and chain store sales should underpin the headline retail sales, which is expected to rise 0.4% after slipping 0.1% in April. Separately, the strong rebound in import prices is likely presages an uptick in US inflation readings. That said, yesterday’s services spending survey pointed to larger than expected decline in health care spending in Q1. In the GDP estimates, it has been assumed to be stronger. The Affordable Care Act is thought to be behind this development. It has negative implications for revisions to Q1 GDP revisions.

Stocks continued strong on Monday and Tuesday with the Russell MicroCap iShares and Russell 2000 ETF picking up where they left off. Money is also moving into economically sensitive groups with the Home Construction iShares (ITB) extending its breakout and the Retail SPDR (XRT) challenging a key trend line. ITB exceeding resistance in late May and then consolidating with a small wedge.

This consolidation clearly ended with a three-day surge towards 25. I would now use the consolidation lows and trend line break to mark support in the 23.5-24 area. ITB is clearly in bull mode as long as this zone holds. The XRT breaking above its May highs and challenging the November trend line for the fourth time. Momentum on the XRT is positive with the MACD printing upward with a higher trajectory.

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