The retail sector is a key component of the U.S. economy, and there are several indications that things are not looking very good for the sector. Last week the retail sales figures for December were released and it showed an unexpected decline of 1.2%. Analysts were expecting an increase of 0.1% for December.

The headline number wasn’t the only area where there was disappointment either. If you took out gas and automobiles, sales were down 1.4% for the month and that was the biggest drop since March 2009. This same subset of retail sales was up 0.5% in November.

This information came out last week and we are entering the stage of the earnings season where many retailers report. In the week of February 25 through March 1, there are a number of major retailers set to release fourth quarter earnings results. Among the companies set to report next week are Best Buy, Dillard’s, Gap, Home Depot, JC Penney, Lowe’s, and Nordstrom.

I looked at the analysts’ estimates for the seven companies listed above – none of the consensus estimates had been lowered in the past week and one had even been raised—Dillard’s. This is concerning considering how the overall retail report came in well below estimates. I wouldn’t be surprised if we see several disappointing earnings reports from the group.

Unfortunately, the concerns don’t end with the earnings reports. A recent article in Investor’s Business Daily looked at how the early tax returns were showing much lower tax refunds for 2018 than the previous year.

According to the article, the running total of tax refunds paid through February 15 was $5 billion behind the same figure in 2017. That information is based on IBD’s own analysis and UBS estimated the refunds are $11.5 billion below the firm’s own forecast.

I have seen a number of articles about how people have been surprised by much smaller refunds than what they are used to or expected. With the tax overhaul that was passed in late 2017, many people expected higher refund checks and had likely earmarked that money for shopping sprees. With the refunds being smaller than expected, it is highly likely that retailers will not see a big boost in sales during tax refund season.

Consumers that were planning to buy a new mobile phone or a new television with their tax refund won’t be able to do so, or at least it sounds like their goals might have to be ratcheted down.

Something else to keep in mind is that the December sales figures weren’t impacted by the government shutdown and January’s numbers were affected. This leads me to believe that overall retail sales are likely to show another decline in January.

All of these signs are adding up to what will likely be a disappointing period for the retail sector—slower sales in December, a likely decline in sales for January, and smaller tax refund checks.

Like most stocks and sectors, the retail sector has bounced sharply higher since the December low. We see on the chart below that the SPDR S&P Retail ETF (NYSE: XRT) dropped down to the $38 area in December and has since bounced back to as high as $45.89. That is a jump of over 20%.

What strikes me about the chart is that the XRT hasn’t been able to move back above its 52-week moving average yet and that trend line could act as resistance.

If you are looking to benefit from a downside move in the XRT, the easy way would be to buy put options on the ETF. I looked for an inverse ETF for the retail sector and there are a few out there, but none of them see very much volume, and I am always hesitant to buy in to a stock or ETF that is thinly traded. One fund that I found was the ProShares Decline of the Retail Store ETF (AMEX: EMTY), but the average daily trading volume is below 5,000 shares.