Why retail may be at a make-or-break point

by Michael Tarsala, CMT

Retail stocks are arguably one of the keys to keeping the stock market rally going, as well as the current economic expansion.

The charts I am seeing suggest they are at a possible inflection point.

As Greg Harmon at Dragonfly Capital points out, the Market Vectors Retail ETF, the RTH has fallen back in recent days, but is still sitting near a breakout going back to 2005, based on the log-scale version of its chart.

Source: Dragongly Capital, Stockcharts.com

The stock performance of the group has been driven partly by gains in U.S. retail sales, which have risen the most in 5 months.

The RTH breakout — or lack of one — may be one measure of Wall Street’s economic bullishness going forward, relative to expectations.

In that very context, I find it interesting that Keshav Agrawal, who runs Covestor’s Retail, Tech and Finanical model, is no longer bullish on the retail group, due to his fears of a bumpier ride for the U.S. economy.

“I really don’t think the RTH is going to go up more; I’ve been taking off retail positions,” he told me this week.

He told me his concerns include rising gasoline prices taking a bite out of consumer spending, as well as economic reports that are no longer blowing the doors off of expectations.

Also of note, Michael Lehmann of Be Your Own Economist wrote this week that while nondefense capital goods orders are strong, they might not be strong enough to sustain strong growth and get the economy back to full employment.

One of Agrawal’s largest positions is Youku (YOKU), the YouTube of China. In addition to being bullish on the concept, he likes that the investment has limited ties to the U.S. economy.