XRT: Bullish on retail

Update 8/15/2013: XRT has been on the shelf awaiting a roll into a new position since my option spreads were closed on Aug. 9 as expiration neared. The ETF gave a close signal today, ending the possibility of a roll.

I held only one position in XRT; there were no rolls. Shares during the 31 days that position was open rose by 1.5%. The options spreads yielded 15.2% on risk.

The exchange-traded fund that tracks the retail sector, XRT, moved above its 20-day price channel on Monday, sending a bull signal that it confirmed today by trading still higher.

ETF break-outs that meet my criteria are a rarity. Generally, they lack sufficiently high yields to make the cut.

ETFs, after all, represent the net performance of many stocks, and that tends to iron out the extremes.

XRT tracks the S&P Retail Select Industry Index, which is composed of 97 stocks. The 10 having the highest weighting are GRPN, SFLY, GME, AWAY, FRAN, ANN, ULTA, EXPE, DLTR and JOSB.

As a trader, I have little interest in ironing the outliers. I seek the extremes. That's where the bigger profits are.

XRT has been in an uptrend since late 2008, when the markets began to recover from the Great Recession crash. The most recent leg up began at the end of 2012, from $60.66, and carried to a high in May of $79.56. A five-week correction carried the price down to $73.85 in late June, and the ensuing three-week recovery has brought XRT to a higher high today
(so far) of $80.25.

This is XRT's third bull signal since the present leg up began. Both of the two completed signals were profitable, yield 6.2% on average over 44 days.

Since the last major correction in October 2011, XRT has completed six bull signals, five of them successful for a 5.4% average yield over 42 days, and one unsuccessful, for a 3.4% loss over 17 days.

The resulting 2% win/lose yield spread is on the low side, but that flaw is largely overshadowed by the 83.3% win rate.

XRT 90-day 2-hour

Over the past year XRT has shown a nearly perfect correlation with the S&P 500 -- +0.98. Only since June has that high correlation begun to falter. The 50-day correlation now stands at +0.75, which is still high.

So to buy XRT, arguably, is to buy the S&P 500, but with a bit more yield and volatility.

XRT, unlike the S&P 500, has pushed above the May 22 peak that kicked off the subsequent market correction that has inspired so many scary headlines. That higher high gives XRT's Elliott Wave count a decidedly bullish cast.

XRT tracks the S&P Retail Select Industry Index, which is composed of 97 stocks. The 10 having the highest weighting are GRPN, SFLY, GME, AWAY, FRAN, ANN, ULTA, EXPE, DLTR and JOSB.

The ETF is one of six symbols to survive my initial screening last night. (See "Tuesday's Prospects".)

XRT has the highest volume of the six, and it's the only one I looked at today. The diversification and shielding from individual earnings announcements and news surprises that ETFs provide is too compelling for me to forego.

XRT on average trades 2 million shares a day and supports a wide selection of option strike prices with open interest running to two and three figures. It's tradeable, but only if I bend the rules slightly. I generally require three-figure open interest.

The bid/ask spread on front-month at-the-money calls is a miniscule 1.1%.

Implied volatility is running at 18% and has been declining since late June. Options are pricing in confidence that 68.2% of trades will fall between $76.21 and $84.49 over the next month, for a potential gain or loss of 5.2%, and between $78.36 and $82.34 over the next week.

Today's option trading is heavily skewed toward the put side, which is running at more than five times the five-day average volume. Calls are running at a bit more than twice average volume.

The fair-price zone on today's 30-minute chart runs from $79.89 to $80.21, encompassing 68.2% of transactions surrounding the most-traded price, $80.05. XRT opened today near the most-traded price, dropped below the zone subsequently rose above the zone, where it stands with a bit less than three hours to go before the closing bell.

XRT goes ex-dividend in September for a quarterly payout yielding 1.32% annualized at today's prices.

Decision for my account: There's little to dislike about XRT, beyond the very near term put skewing of the options. My time horizon is somewhat longer, so it's not a deal-killer. 

I've opened a bull position in XRT, structuring it as short vertical options spreads expiring in August, short the $80 puts and long the $75 puts. The structure provides a 1.9% cushion between the entry price of the underlying and the break-even point of the spread. It has 4.3:1 leverage with a potential maximum yield of 19%.

References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.