The Retail sector just broke into a new long-term bear market trend, and things are going to get worse.
Investors that own any retail stocks know the pain that these companies have been facing. Inflation, dropping consumer confidence, tightening budgets… it’s 2022 all over again!
Sure, there are a few “diamonds in the rough” like Walmart and Kroger, but in general, this is an industry that is getting ready to drop 20-30% of its value as a group.
There’s an easy way to benefit from the long-term bearish outlook, I’ll get into that trade idea in just a minute.
First, let’s look at what’s going on in the retail sector.
Historically, we’re heading into a seasonally strong period for the retail sector.
Over the last 20 years, the SPDR Retail ETF (XRT) has seen a tailwind in March and April as shoppers emerge from their long winters indoors and spend money preparing for the spring and summer.
Everything from apparel to outdoor supplies fly off the rack, ringing up stronger sales that bump profits for the quarter, but that’s not the case this year.
Instead, consumers are lowering their expectations, and spending, for the first half of the year for several reasons.
Fear of inflation, a potentially weak employment market and worries about the economy have consumers dialing back their spending.
What’s worse is that that retail companies are now planning for the decline in top line revenue to combine with increased costs from new tariffs on products from Canada, Mexico, China and other major importers.
This means smaller margins and eventually a hit to the bottom-line earnings per share.
As of Tuesday, Best Buy, Walmart, Kroger and other large retailers had already warned of lower profits and earnings.
The outlook and data have the retail companies and the industry ETF spiraling into a long-term bear market trend.
Remember, investors “speak” with their money, and right now they’re screaming that the sector is running lower.
In November, we saw the XRT reach its seasonal highs as part of one of the most reliable seasonal trends out there.
Each year, the retail sector spends the months of September through November – right up to Black Friday – in rally mode as investors anticipate the holiday shopping season.
Last year was no different as the XRT returned an impressive 18% for the period.
Since then, the market has been faced with a few challenges, the most recent being tariffs of course.
The ripple effect through the retail ETF’s pricing has shares now trading 16% from their November highs.
From a technical standpoint, the retail ETF just shifted into a long-term bear market trend as it moved below the long-term 20-month moving average.
This happened after a bearish momentum shift in February as the XRT’s 20- and 50-day moving averages moved into bearish trends. Those bearish trends forecast lower prices over the next 4-6 weeks.
The bearish shift to the 50-day a few weeks ago now has the Retail ETF (XRT) on course to draw a “Death Cross” technical pattern.
A Death Cross occurs when a stock’s 50-day moving average crosses below its 200-day moving average. The patter is a display of worsening breadth or momentum for a stock and forecasts lower stock prices over the next 3-6 months.
The combination of a Death Cross and the retail ETFs move into a long-term bear market will increase selling pressure in the sector and the XRT shares.
The results, investors should expect to see the retail ETF (XRT) trade towards a target of $60 over the next 2-3 months.
Bottom line, investors that hold retail stocks, especially those considered “discretionary”, should consider paring the holdings in favor of more defensive positions as the market works through this unstable period.
This is where I wish I could tell you that there was an inverse ETF for the retail sector, but there’s not. Don’t fear though, investors with a little education on how to trade options have an easy way to not only hedge the risks in the retail sector but even leverage the bearish move.
Longer dated put options on the retail ETF (XRT) allow the 2–3-month outlook for the retailers to play into educated investor’s hands.
Investors can consider the September 19, 2025 XRT $70 strike put as an attractive way to profit from further declines in the retail ETF.
With six months to expiration, this option offers plenty of time for the XRT to hit its 2-3-month target price of $60.
As of this writing, the September 19, 2025 XRT $70 strike put is trading for $430 per contract.
Keeping the analysis simple, a move to the $60 target anytime between now and the September 19 expiration date would result in a return of 132%.
Here’s the math behind that…
The return on this put option hedge would increase dramatically if the target price were achieved within the 2-3-month window as the option would retain much of its time premium, adding to its value.
As always, investors need to endure that they have the options trading education and experience to participate in this or any other option trading strategy.
I’ll be back on Friday to talk about the Best- and Worst-in-Breed stocks within the retail sector to give you even more potential to turn the market’s trends into profits.
