CHS Chicos FAS Inc

Reflecting continued optimism about the U.S. economy, retail stocks are on pace to mark their third quarterly gain in a row.

The advance would contribute to their almost doubling in price since a low at the end of 2008 as retailers licked their wounds from a terrible holiday selling season.

But the stocks' momentum is slowing, with the Standard & Poor' Retail Index up 1.4% for the first quarter, after an 11% rise in the prior quarter and a 19% advance in the last year's third quarter. The retail index is also lagging the 5.6% first quarter advance being seen by the broader market Standard & Poor's 500 Index. The first quarter ends at the close of trading Thursday.

Still, the upward move by retail stocks reflects how investors are feeling about conditions in the U.S. since retailers' own fortunes are so closely tied to consumer spending.

The stocks' trajectory "speaks well for sentiment against a double-dip recession," said Sahk Manuelian, managing director of trading at Wedbush Securities. "The economy is trying to get well and people are starting to spend again, especially on the high end."

Lower-end retailers' shares have also been elevated, by takeover chatter, which is another positive indicator, Manuelian said. "People feel that things are still priced inappropriately low and that is why you are seeing private equity come in."

Retailers have recovered sharply from the worst recession in over a generation, with many posting very strong results last year that were reflected in reports issued during the current quarter.

The first quarter's big gainer is Big Lots Inc. (BIG), up 42% amid ongoing takeover speculation during the period. 99 Cents Only Stores (NDN), another takeover candidate, rose 23% during the first quarter.

Chico's FAS Inc. (CHS), Jos. A Bank Clothiers Inc. (JOSB) and Tractor Supply Co. (TSCO) were also double digit percentage risers in the first quarter.

Target Corp. (TGT), Barnes & Noble, OfficeMax Inc. (OMX) and RadioShack Corp. (RSH) all fell 16% or more over the period.

Wal-Mart Stores Inc. (WMT), which is not in the index, but is the biggest retailer in the U.S., dropped roughly 3.5% in the first quarter. The retailer is trying to bring domestic operations back up to speed after U.S. same-store sales have fallen seven quarters in a row.

As the quarter wraps up on Thursday, the S&P Retail Index is finishing the session to the downside, off 0.6%. Barnes & Noble Inc. (BKS), J.C. Penney Co. (JCP) and Best Buy Co. (BBY) are all down more than 2%. Zumiez Inc. (ZUMZ), Abercrombie & Fitch Co. (ANF) and Williams-Sonoma Inc. (WSN) lead the advancers with gains of at least 1.5% on Thursday.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

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