Will Christmas Come Early for Retail Stocks?

Editor’s note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.

Retails Stocks: Betting on the U.S. Consumer Ahead of Retail Sales Data

On November 16^th at 8:30am the October Retail Sales data report will be released. The report provides an aggregated measure of sales of retail goods and services over a period of a month.

In September, the data showed an unexpected increase of 0.7% month-over-month following an upwardly revised 0.9% surge in August and beat market forecasts of a 0.2% decline. This was seen as a solid sign of consumer strength in the face of post-COVID-reopening supply chain crisis. This unexpected increase followed the previous disappointing month of July, where sales dropped 1.6%. Retail sales have been choppy over the last six months.

Before pulling back in the last week, consumer discretionary stocks continued to make new all-time highs this year. They are also testing their all-time relative to the S&P 500. Much of this is one stock – Tesla – which is up over 52% on the year. Other automakers like Ford and GM have delivered outsized contributions as well.

Retail–specific stocks offer an entirely different setup. Thanks to GameStop, the group ripped to start the year, but have stalled out over the past six months making them potentially ripe for opportunity. They have traded in a channel and may be ripe for a move either up or down.

Retail Stocks Crushed It, Before Stalling Out

Source: Bloomberg Finance, L.P., as of October 28, 2021. Retail represented by the S&P Retail Select Industry Index, Consumer Discretionary represented by the Consumer Discretionary Select Sector Index, and US Market represented by the S&P 500 Index.

RETL and WANT ETFs: What Factors May Affect the Retails Stock Report's Numbers?

Retail and Consumer Discretionary stocks will likely be volatile heading through the end of the year as investors digest the impact of global supply chain disruptions and labor shortages potentially impacting margins. Either way, retail stocks will likely be on the move heading into the holiday season.

What if The Numbers Are Better? Worse?

While the economies of the United States and many other countries continue to look to be on the path to recovery, it may be only a matter of time until people around the world begin to spend more and end up contributing to a global resurgence in the discretionary economy. The real trick to the trade is in the timing. COVID variants, supply chain conundrums, and inflation worries may cause more ups and downs in the short run.  Know the risks of trading leverage before you place your bet.

Betting on the Consumer? The Trick is in the Trade.

One tool for taking a position on the consumer, including internet and specialty retail, on a short-term basis is the Direxion Daily Consumer Discretionary Bull 3X Shares (WANT). The WANT ETF provides 3X leverage on a daily basis of the Consumer Discretionary Select Sector Index, an index of consumer discretionary companies based in the United States.

For traders looking for short-term exposure to a bullish hypothesis on discretionary consumer spending, WANT provides a vehicle for leveraged speculation on an extremely important industry including companies like Amazon, Tesla, Home Depot, McDonald’s, and Nike. These top 5 stocks comprise a whopping 56% of the index.

For those who want exposure to a narrower group of retail stocks, there’s Direxion Daily Retail Bull 3X Shares ETF (RETL) which seeks a return that is 300% the return of the S&P Retail Select Industry Index for a single day. This index employs a modified equal-weighted approach, which increases potential volatility as large, mid, and small cap companies can have similar exposure in the index. RETL is up 390% from its 52-week low, but down 33% from its 52-week high. It’s heading into the report with depressed Relative Strength over multiple time periods.

Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment.

WANT Index Top Ten Holdings % (as of 9/30/2021)

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The “S&P Retail Select Industry Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty Asset Management, LLC (“Rafferty”). Standard & Poor’s^® and S&P^® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones^® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Retail Select Industry Index.

The Consumer Discretionary Select Sector Index is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty Asset Management, LLC (“Rafferty”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Consumer Discretionary Select Sector Index.

Direxion Shares Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The Fund does not attempt to, and should not be expected to, provide returns which are three times the return of its underlying index for periods other than a single day. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Market Disruption Risk, Aggressive Investment Techniques Risk, Counterparty Risk, Intra-Day Investment Risk, Daily Index Correlation/Tracking Risk, Other Investment Companies (including ETFs) Risk, and risks specific to the securities of the Retail Industry and Consumer Discretionary Sector. Retail and related industries can be significantly affected by the performance of the domestic and international economy, consumer confidence and spending, intense competition, changes in demographics, and changing consumer tastes and preferences. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.

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