Retail is at a Crossroads—Buy Now or Stay Away?

As “economic softening” increasingly emerges as the prevailing narrative driving the markets, the retail sector occupies a peculiar space amid these shifts in investor confidence, inflation fears, and looming tariff woes. This is because retail straddles both cyclical and defensive sectors, accounting for a huge chunk of Consumer Discretionary and Consumer Staples spending. January retail spending saw its sharpest decline in two years, though post-holiday spending may have distorted the data. The coming report in mid-March might provide a clearer picture.

In a nutshell, here’s what’s weighing on investors’ minds:

• Tariffs could drive up costs which may be passed on to consumers.
• Immigration policies might trigger labor shortages, further increasing expenses.
• Both factors could disrupt the broader supply chain, impacting everything from sourcing to sales.

Despite these challenges, analysts are expecting moderate growth for retail in 2025. With that in mind, let’s take a look at where retail stands relative to Consumer Discretionary (XLY), Consumer Staples (XLP), and the S&P 500 ($SPX).

Below is a PerfCharts view.

FIGURE 1. PERFCHARTS COMPARING XRT WITH XLY, XLP, AND THE S&P 500. Retail underperformed all of its peer components.Chart source: StockCharts.com. For educational purposes.

I’m using the SPDR S&P Retail ETF (XRT) as the retail sector proxy. Its holdings are primarily concentrated in discretionary retail (broadline, apparel, automotive, and specialty), with secondary holdings in staples (food and drug retail).

Over the last year, XRT has lagged the broader market and the Consumer Discretionary and Consumer Staples sectors, in which it has some participation. Yet Wall Street expects moderate and stable growth in discretionary and staple retail spending, respectively. With XRT beaten down among its peers, could it be approaching a bottom and presenting a potential buying opportunity?

Below is a weekly chart of XRT.

FIGURE 2. WEEKLY CHART OF XRT. It doesn’t seem like there was much going on over the last three years.Chart source: StockCharts.com. For educational purposes.

XRT had a significant rise, a sizable decline where its valuation was cut in half, a volatile period of sideways movement, and a higher and less volatile period of even more sideways movement leading to where it is now.

The Bollinger Bands^® will help you visualize the strength of the trends (when XRT was trending) and the upper and lower threshold of its varying sideways movement over the last three years or so.  If XRT is poised for moderate growth, its position near the lower Bollinger Band suggests a potential long entry. But is this just another rangebound trade to be sold near the upper Bollinger Band?

Let’s take a closer look at a daily chart.

FIGURE 3. DAILY CHART OF XRT. A swing trader’s paradise?Chart source: StockCharts.com. For educational purposes.

The cycles aren’t perfect, but that’s what you’re immediately presented with here. XRT seems to be trading in sync with the Stochastic Oscillator, which is particularly effective in forecasting turning points in a non-trending market such as this one. The Keltner Channel, which is slightly less sensitive to volatility than Bollinger Bands because it is based on the Average True Range (ATR) rather than standard deviation, pairs effectively with the stochastic oscillator for anticipating market reversals and “fading” tops and bottoms.

So is this a “trading” stock or a stock you can invest in for the longer term? Here’s how I’d approach it.

• Swing traders are likely to buy at these levels, with the goal of selling as soon as price either reaches the top Keltner Channel or the stochastic reading reaches 80 (or both). This is risky, of course, and swing traders’ stop-loss would vary depending on their strategies.
• Investors hoping that XRT will rally beyond the channel, breaking its trading range, would want to set a stop loss a few points below the current low. Investors will hope to see XRT break above the last swing low of $77 and eventually $82 (the most recent swing high) while forming a consecutive low that’s above the most recent swing low of $73.50. If it fails to do this, then it’s likely to remain rangebound. If XRT closes below $73.50, then the likelihood of further downside is greater.

At the Close

Retail’s dual role in discretionary and staple spending makes it difficult to forecast, and XRT’s sideways movement reflects that uncertainty. Swing traders may find short-term opportunities, but long-term investors should wait for a clear breakout. Without momentum, staying on the sidelines might be the safer choice.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.