Three months after the worst holiday sales season in recent memory, there have been signs that retailers are beginning to pick themselves off the mat. First, stocks in the hardest-hit retail industries rallied, and it looked as if consumers had finally stopped slashing spending. Then on Apr. 14, new retail sales data came in well below expectations. The March data, which showed a 1.1% decline in sales, don't completely refute the optimistic case for investing in retailers. But the U.S. Census Bureau report is the latest reminder that there will be no easy comeback for the retail sector.

According to Standard & Poor's (MHP), department store shares dipped 2.6% on Apr. 14 in response to the March numbers. But in the previous 13 weeks, department stores had rallied 22% -- quite a recovery from their 50% decline through 2008. Other retail industries battered last year have shown surprising strength. Apparel retailers were up 28% in the last 13 weeks, S&P says, following a 42% drop in 2008. Internet retailers advanced 36% after falling 49% last year.

The best performers recently -- since the broader market hit bottom in early March -- were the worst performers during the bear market, says Rochdale Research analyst Jaison Blair. "We believe we are in the early-to-mid stage of the bottoming process in the retailing sector," he wrote on Apr. 9.

Wal-Mart (WMT) has been a recession favorite of investors for its focus on discount merchandise. But Wal-Mart shares are up just 4.5% since the Mar. 9 market low, while shares of upscale department store Nordstrom (JWN) have rocketed 72% higher. After such a strong rally for retailers, Blair said he was cautious about the possibility of future gains in the near term. But overall, analysts and investors have sounded much more optimistic about retailers recently. On Apr. 13, for example, JPMorgan (JPM) analysts raised earnings estimates for Wal-Mart, JCPenney (JCP), Nordstrom, Target (TGT). and Macy's (M).

"The patient is still bleeding" Despite the disappointment in March, economic data have also raised hopes.

From the first quarter of 2008 to the first quarter of 2009, total retail sales are down 8.8%, the Census Bureau estimates. However, the steepest declines occurred in the second half of 2008, when retail spending fell off sharply. Since yearend, consumer spending has actually inched higher. Before March's 1.1% drop-off, retail sales actually rose 1.3% in January and inched up 0.3% in February. "It looks like the rate of decline is diminishing," says Keith Hembre, chief economist at First American Funds.