The retail sector has been the hottest sector over the last two months. The SPDR S&P Retail ETF (NYSE: XRT) has gained 15.66 percent since the beginning of November and that is nearly double the gains from the consumer staples sector and the consumer discretionary sector which have both gained right around eight percent.
Unfortunately the rally in the XRT has caused the fund to reach an overbought status on two different overbought/oversold indicators. The 10-week RSI recently moved above the 70 level and the weekly slow stochastic readings have been in above the 80 level for some time now. Looking at the chart, we see that the two indicators haven’t both been in overbought territory at the same time since April ’15, right as the fund was hitting its high. It did consolidate between $47 and $49 for several months before it fell from the $49 level down below the $37 level in early 2016.
While the developments on the chart are reason enough to believe that the run is over, the sentiment toward the sector has moved to an extremely optimistic level. The composite sentiment reading from SentimenTrader.com moved above the 90 level earlier this month. This indicator combines things like the short interest ratio, the put/call ratio and price behavior. In the last three years the indicator has only been above the 90 level on a few occasions. The last time was in November ’16 right as the fund peaked just above the $47 level. The only other time was in March ’16, right before the fund fell from the $45 level down to the $39 level. In both of those instances, the sentiment wasn’t as high as it was recently.
Overbought levels on a stock or ETF aren’t enough to get me to sell a stock or fund, but when you combine overbought readings with an extreme level of optimism, that concerns me greatly.