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Why Retail ETFs Need to Get Back on Track

tlydon@globaltrend.com (Tom Lydon)

ETFs following retail and consumer discretionary stocks have been among the top sector performers in 2012 but have faltered along with the S&P 500 in May. The sector regaining its footing would be a positive sign for the overall market and sentiment on consumer spending, which dominates the U.S. economy.

“The floor looked to be collapsing for the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY ) last Friday but trading on Monday was very positively with a key-day-reversal. That bullish turn occurred just above the 200-day exponential moving average and constitutes a successful test,” said Investors Intelligence technical analyst Tarquin Coe in a newsletter Wednesday.

“Momentum is turning up as is the relative chart versus the S&P 500. The relative trend has been steadily rising for many months,” he wrote. “If the equity sell-off is bottoming, as the S&P 500 action, as well as this ETF, are suggesting, we would need to rebuild our long exposure to avoid being left at port.” [What Consumer ETFs are Saying About the Market]

Other alternatives for this sector include SPDR S&P Retail (XRT - News), First Trust Consumer Discretionary AlphaDEX (FXD - News), Vanguard Consumer Discretionary (VCR - News) and iShares DJ US Consumer Services (IYC - News).

“Given that about two thirds of economic activity is fueled by consumer spending, investors should closely examine the economic backdrop and try to understand what the market presumably already is pricing into consumer discretionary-related stocks,” Morningstar says in an analyst report on XLY.

Since the fund is a cyclical play tied to consumer spending “it’s not an ETF to own when the United States is facing a prolonged recessionary environment,” according to the report. “At the same time, cyclical firms usually do rally before the economy fully emerges from a slump.”

XLY is up 10.3% year to date to outperform the S&P 500.

“In recent months, consumer sentiment has rebounded nicely. However, income isn’t growing much, so even with slight gains in employment, continued expansion may be stunted or halted altogether if there is not more job growth,” Morningstar noted. “On the positive side, interest rates are low, and history has shown that the U.S. consumer has proved resilient.”

Consumer Discretionary Select Sector SPDR