Granny Retail, SPDR S&P Retail ETF (XRT) is displaying weakness in leadership and momentum. XRT was overbought on Real Motion and Price and mean reverted.

Today, the Commerce Department’s retail sales report showed solid consumer spending. Yet robust retail sales data failed to boost the market.

Consumption accounts for approximately 70% of our economy. SPDR S&P Retail ETF (XRT), or Granny Retail, is a large, diversified ETF representing broad market consumption. Although various factors are at play, inflation is the current driver of consumer spending and retail sales growth. This trend is likely to continue.

XRT was nearly crossing the 200-day moving average and looking to regain this key technical price level, but Granny Retail (XRT) dropped almost 4% today. XRT was overbought on Real Motion and Price and subject to mean reversion today. More continued pain is possible, with support around 60 USD near the 50-day moving average.

While overall retail sales remain strong, it’s clear that the sector is being squeezed. Investors should keep an eye on this trend to avoid companies struggling to adapt.

Consumption has been squeezed from all sides — wages are stagnant, while rents and other living costs continue to increase — so any sign that the Fed will continue raising interest rates could lead to less retail sales.

Shelter, which makes up one-third of CPI, rose from 6.6% in September to 6.9% in October, the largest percentage increase in the shelter component since August 1990. Keep in mind that 6.9% number is still lagging. Regardless of the inflation debate, US CPI is 7.7% year over year and US PPI is 8.0% year over year.

Suppose you take the last two months’ percent change in CPI above, which was 0.4% in September and a 0.4% increase in October, and multiply 0.4% (monthly change) x 12 (months), this equals 4.8% of annual inflation. Retail consumption is being squeezed by inflation, and certain retailers like Walmart (WMT) are well-positioned to take advantage of this trend. The company’s stores are seen as a place for value amidst a tough economy. While there are some concerns about inflationary pressures pushing the economy into recession, for now, at least, select retailers can enjoy the benefits of margin expansion and continued consumer demand.

Though strong headwinds still face the US consumer, prices are rising, and now retailers are raising their prices too. Retailers offering value and additional services have pricing power and can pass increased costs to consumers. How long can we expect CPI to moderate when Home Depot (HD), Walmart, and other leading retailers increase prices to maintain profitability? 

All of this suggests that inflationary pressures are still present in the economy, and this trend is likely to continue as prices rise.

Retail consumption is growing due to higher prices and inflationary pressure- this represents a good trading opportunity for those that can capitalize.

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Mish in the Media

Read Mish’s latest article for CMC Markets, titled “What’s Next For Key Sectors After the Midterms“.

Mish explains why MarketGauge loves metals and is still patiently loading up equities on Business First AM.

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See Mish talk with Charles Payne on Making Money about the Oil markets testing the limits of Fed policy, China, and what to buy in the metals.

Mish joins Cheddar to talk about some of the fallout from the most recent Fed Meeting.

See Mish join Neil Cavuto and Eddie Ghabour on Cavuto Coast to Coast to talk about the Fed’s recent rate hike decision.

ETF Summary

S&P 500 (SPY): 392 support and 398 resistance.Russell 2000 (IWM): 182 support and 186 resistance.Dow (DIA): 333 support and 339 resistance.Nasdaq (QQQ): 282 support and 289 resistance.KRE (Regional Banks): 61 support and 65 resistance.SMH (Semiconductors): 214 support and 222 resistance.IYT (Transportation): 223 support and 227 resistance.IBB (Biotechnology): 132 support and 136 resistance.XRT (Retail): 61 support and 66 resistance.

Keith Schneider

MarketGauge.com

Chief Executive Officer

Wade Dawson

MarketGauge.com

Portfolio Manager