By Martinne Geller and Brad Dorfman

NEW YORK/CHICAGO (Reuters) - U.S. retail stocks rallied on Monday as a drop in oil prices fueled optimism about a possible rebound in consumer spending and hopes that earnings will prove better than expected.

The Standard & Poor's Retailing Industry Group Index rose 4.8 percent, outperforming the S&P 500 Index .SPX and Dow Jones industrial average .DJI, which were each up less than 1 percent.

"The stocks were so oversold last year, and for most of this year," said Standard & Poor's retail analyst Marie Driscoll. "I think you're seeing the cloud lift with oil prices drop. The $4 gas price was really crimping into consumers' ability to spend."

U.S. light crude CLc1 fell as low as $112.72 per barrel on Monday as a drop in crude imports by No. 2 consumer China outweighed concerns over supply disruptions stemming from the conflict between Georgia and Russia.

Retail shares that jumped at least 5 percent on Monday included apparel retailers like Tween Brands Inc , Gap Inc and Abercrombie & Fitch Co ; department stores Kohl's Corp , Nordstrom Inc , and Saks Inc ; and home goods chain Pier 1 Imports Inc .

"The people who have been taking the money out of oil have to go somewhere, and these stocks are cheap, cheap, cheap," said Patricia Edwards, retail analyst at Wentworth, Hauser and Violich.

Before Monday's rally, retailers with discounted multiples include Abercrombie & Fitch, at 8.4 times next year's estimated earnings, Macy's Inc , J.C. Penney Co Inc and Nordstrom, all with multiples of about 10. Those compare with an average multiple of 13.9 for the S&P Retailing Index.

"Everything that is coming off the bottom is coming off the bottom because the consumer will at least have a little bit of breathing room," Edwards said, while adding that the consumer is still likely to remain cautious.

Investors had also taken big short positions in many retail stocks, betting that the stocks would fall further, she said.

"If you are taking your short bet off of retail, all of them are going to rally," Edwards said.

Another reason for the rally, according to S&P's Driscoll, is that retailers that have already reported second-quarter earnings have shown good inventory management, which protects their margins by alleviating the need to discount heavily.

"While the consumer is shopping at a slower pace, retailers' margins are not suffering dramatically," said Driscoll, whose coverage includes Polo Ralph Lauren Corp and Liz Claiborne Inc .

Providing another confidence boost was a research note from Goldman Sachs analyst Adrianne Shapira who said Wal-Mart Stores Inc could beat its second-quarter outlook and raise its full-year view when it reports earnings on Thursday.

Yet Morgan Keegan analyst Laura Champine, who covers home-goods manufacturers and retailers, cautioned against being too optimistic on the stocks in her coverage group, which include home improvement leader Home Depot Inc , furniture companies and home-decor chains such as Pier 1.

"I haven't seen any evidence that the fundamentals are improving or that we're even stabilizing," Champine said.

Her skepticism was shared by Peter Schiff, president of Euro Pacific Capital Inc, who said aside from oil prices, consumers are still being squeezed by rising food prices and tight credit.

"Just because American consumers are going to save $50 a week on gas doesn't mean they are going to take that $50 and run right to the mall with it," he said.

(Additional reporting by Karen Jacobs in Atlanta and Nick Carey in Chicago; Editing by Braden Reddall)