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Retail Sales Data: The Biggest Driver of Retail ETFs

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The recent wave of economic news from the U.S. economy has been rather dicey for the markets. While the employment picture disappointed, the minutes of the latest FOMC meeting was nothing less than ‘expected.’

Also, whether or not the present stock market sentiments are justified by the economic fundamentals remains an open ended question with the answer slightly tilted in favor of a ‘yes’ (read How the Buyback ETF Continues to Beat SPY).

Still, any boost in economic data surely does add to the optimism in the market. On the contrary slack economic data does cause an initial dip in equities, which in turn provides a buying opportunity and the dip is bought. Actually the truth is, with such optimism in the market, it is hard to separate ‘good’ from ‘bad’.

Nevertheless, one such economic indicator is the Retail Sales Data which is not only considered to be an important piece of information for retailers, but also for the broader markets. This is because it help to gauge the value of retail purchases made, but also gives an idea about the consumption growth pattern in the economy, which in turn is a vital part of economic growth.

The Retail Sales Data for the month of March ’13 is due to release this Friday, the 12th of April 2013. While last month the data had an impressive growth of 1.1% posting a solid economic surprise, the outlook for the current month remains flat. This is primarily due to a slack jobs market and the impact of higher taxes.

In fact, the expectation surrounding last month’s data was also bleak on grounds of higher taxes and the sequester taking shape. But, the release surprised everybody with an impressive reading, causing the Retail ETFs to rally (see Is This a Bull Market for Retail ETFs?).

The three well known ETFs, the SPDR S&P Retail ETF (XRT - Free Report) , PowerShares Dynamic Retail ETF (PMR - Free Report) and the new Market Vectors Retail ETF (RTH - Free Report) posted serious gains surrounding the release.

In fact, the Retail Sales Data has proven to be a game changer for the retail companies over the long haul. To visualize the results we have plotted the historical monthly seasonally-adjusted retail sales data with two of the most well known and popular ETFs from the retail space, XRT and PMR (read Is the Korea ETF About To Breakout?).

The charts depict the relative monthly movement of XRT and PMR respectively versus the Retail Sales Data.

Not surprisingly, the trends of the two ETFs seem to be having a very strong resemblance with the trend of the Retail Sales Data. The ETFs move in almost total lockstep as the data. Of course judging its resemblance by visual graphical representation is of very little value.

We have therefore run a statistical correlation of the retail ETFs with the monthly Retail Sales Data. The experiment reveals that XRT, PMR and RTH have a correlation coefficient of 88.52%, 88.64% and 92.49% versus the Retail Sales Data (see Time to Buy this Precious Metal ETF?).

Not only do these results prove that the retail sector is heavily correlated to the Retail Sales Data, but also derives an important assertion—Its is not only about vague sentiments, but also about the fundamental factors, which are well and truly in play for this segment.

Therefore, it is prudent to assume that if we witness an uptick in the Retail Sales Data,  we should expect good gains from the retail ETFs. And if these important figures come in below expectations or suggest weakness, look for a rough session in the retail ETF sector to close out the week.

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