The weakest link

A while ago, I talked about the dire prospects for commercial properties and malls and I expected the ETF for commercial properties SPG would go down substantially in the years ahead. There is no telling how this terrible trend will end. I guess it is easily understood that the underlying problem is the megatrend for a dying sector, the retail business relying on brick-and-mortar stores. For hundreds of years, people have been used to go shopping to stores but this has suddenly changed drastically and will only continue more aggressively. Pioneered by Amazon and becoming a normal shopping pattern only in the last decade, on-line retailing has become the norm covering almost all the aspects of our life. It is becoming so easy to buy something with just a click without going out, as such shopping in the physical stores is increasingly becoming a history. The augmented reality technology that is quickly coming to our life will only accelerate this mega downtrend. So if you are thinking about some short ideas, especially if you want to do some hedging for your portfolio if the overall market gets a serious correction, shorting the physical retail companies is likely a safe bet. When everything goes down, the weak hands will go down most for sure.

 

You can short individual companies like JC Penny, Sears, GameStop etc. But a safer way to go with this megatrend is to short the whole sector. The best choice is probably the S&P Retail Fund (XRT). Since this for the whole sector, it certainly also includes some on-line retailers like Amazon (AMZN) but the thing is, over 80% of the companies in the fund are not Internet-based retail business. As such, it largely reflects the downtrend for this brick-and-mortar business. To prove it, just compare the price charts between AMZN (the blue line) and XRT in the past two years, a clear divergence!

 

After its peak in early 2015, XRT got a crash through early 20116 and then kind of stabilized with side-way fluctuations in the past year. But recently it has broken the one year support line. I guess it is probably due to the poor earnings we have seen reported by so many retail stores for the past quarter. This will likely continue in a big way to the downside. But be aware that the relentless selloffs in the past few weeks in this sector has caused a bit oversold for it. Very likely it will have a dead cat bounce. The most probable overhead resistance for XRT should be around $42.5. When that happens, place a short on it will most likely be a winning trade!