Retailers or Retail ETFs: Buy, Hold or Short? XRT, RTH & RETL

Given that retailers had a mixed holiday season while retail ETFs like the SPDR S&P Retail ETF (NYSEARCA: XRT), Market Vectors Retail ETF (NYSEARCA: RTH) and Direxion Daily Retail Bull 3X Shares (NYSEARCA: RETL) have been making declines on their technical charts, should you be buying, holding or folding (as in shorting) retail stocks or ETFs? To begin with, I should mention that we recently started shorting SPDR S&P Retail ETF in our SmallCap Network Elite Opportunity (SCN EO) portfolio mainly for technical (as you will see later in the charts) rather than fundamental reasons as we think retail stocks (and hence retail ETFs) have gotten a little ahead of themselves.

However and for the bearish investors or traders among us, consider the fact that last month, only 74,000 jobs were added for the lowest increase since January 2011 and of those new jobs, 55,000 were added in the retail sector for their holidays (and no doubt many have already received their pink slips). But we need to add a minimum of 127,000 jobs per month just to keep up with annual population growth.

Now consider a recent observation made by money manager David John Marotta in a blog post addressed to investors using Bureau of Labor Statistics' data on the current labor force participation rate, which is about 62.8%:

Based on that figure, he concluded that the unemployment rate in its truest definition is actually 37.2%. Of course, the Drudge Report and the Washington Examiner ran with the 37.2% unemployment story while Marotta had been quick to point out that:

This number obviously includes some people who are not or never plan to seek employment. But it does describe how many people are not able to, do not want to or cannot find a way to work. Policies that remove the barriers to employment, thus decreasing this number, are obviously beneficial.

I should mention that the U-6 unemployment rate, which is considered to be the government's broader measure of actual unemployment in the US, will also regularly posts a much higher figure than the "official" unemployment rate and currently stands at 13.1%. But at the end of the day though, it does not matter whether unemployment is 6.7% or 13.1% or 37.2% because a shrinking labor force will tend to put a lid on overall retail sales albeit there are many other factors at play such as consumer confidence, interest rates and the like.

With that in mind, let's take a quick look at the following retail ETFs:

SPDR S&P Retail ETF. Tracking the S&P Retail Select Industry Index, the SPDR S&P Retail ETF had 102 holdings as of Tuesday allocated in following sectors: Apparel Retail 25.87%, Specialty Stores 16.74%, Automotive Retail (13.93%), Internet Retail (12.32%), Food Retail (8.87%), General Merchandise Stores (6.23%), Department Stores (5.75%), Computer & Electronics Retail (3.33%), Drug Retail (3.16%), Hypermarkets & Super Centers (2.83%) and Catalog Retail (0.97%). Market Vectors Retail ETF. Tracking the Market Vectors US Listed Retail 25 Index, the Market Vectors Retail ETF had 26 holdings as of this week allocated in the following sectors: Consumer Discretionary (54.4%), Consumer Staples (34.5%) and Health Care (11.1%). Direxion Daily Retail Bull 3X Shares. Tracking the Russell 1000 Retail Index, Direxion Daily Retail Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the performance of Index. At the end of last September, Hypermarkets & Super Centers (19.92%), Home Improvement Retail (19.13%), Internet Retail (15.35%), Apparel Retail (12.39%), General Merchandise Stores (9.58%), Automotive Retail (6.16%), Specialty Stores (5.56%), Department Stores (4.99%), Homefurnishing Retail (2.88%), Computer & Electronics Retail (1.90%), Catalog Retail (1.46%) and Personal Products (0.66%).

Here is a chart showing the long term performance of all three retail ETFs verses the S&P 500 and Dow:

As you can see from the chart, the retail ETFs like SPDR S&P Retail ETF, Market Vectors Retail ETF and Direxion Daily Retail Bull 3X Shares have outperformed both the S&P 500 and the Dow since the financial crisis.

However, take a look at the technical charts for all three ETFs:

Notice the double top which looks like an "M" on the chart with the twice touched high being considered a resistance level.

The Bottom Line. If you aren't into options trading, you should probably avoid buying retail ETFs like the SPDR S&P Retail ETF, Market Vectors Retail ETF and Direxion Daily Retail Bull 3X Shares right now while keeping eye out for any individual retail stocks that could be bucking the trend. Likewise and if you are into options trading, if might be more profitable to short a few individual retail stocks (especially those with weak guidance or holiday sales) that have ran into trouble rather than the entire sector.

SmallCap Network Elite Opportunity (SCN EO) has an open position in XRT. To find out what other open positions SCN EO currently has, and to learn why so many traders and investors are relying on this premium subscription service, click here to find out more.