The market’s sudden increase in volatility has taken most investors’ eyes off of the ball. The focus has become what to sell, not the opportunities that are being created by this healthy correction.
Click to Enlarge Warren Buffett has been quoted to have said, “the time to get interested is when no one else is” about stocks. Well, the market is going through one of those periods now, meaning that there are some opportunities to be had.
Our seasonality models are quick to point at consumer discretionary and retail stocks as perennial performers during the fourth quarter of the year.
Looking back over the last five years, the SPDR S&P Retail ETF (XRT) has outperformed the market 75% to 80% of the time for each of the months from September through November. On average, each of these months returns 3.6%, meaning that retail stocks are entering a seasonal sweet spot of sorts.
Similarly, consumer discretionary stocks play to strength during the holiday season, benefiting from an uptick in consumer activity. Over the last five years, the sector as measured by the Consumer Discretionary SPDR (XLY) has returned an average of 3.2% per month for the same three months.
Note that the seasonality effect does wear off as Black Friday passes, indicating there’s a strong “sell the news” presence among these retail stocks. Thus, look to pare your positions in these seasonal buys immediately after the Thanksgiving holiday.
Retail Stocks for the Seasonal Sweet Spot: SPDR S&P Retail ETF (XRT)
Considering the seasonal strength of the two sectors, our models are ranking both the XRT and XLY as “buys.”
SPDR S&P Retail ETF (XRT) shares got a nice technical bounce from their long-term 20-month moving average, maintaining their bull market trend. The shares of this retail ETF show support at the $90 level with an initial target of $100.
Short interest on the XRT component companies has been growing to make this collection of retail stocks the fifth-most shorted among the more widely traded ETFs. This suggests that any seasonal and technical strength will benefit from a short covering rally to help move shares even higher.
Retail Stocks for the Seasonal Sweet Spot: Consumer Discretionary SPDR (XLY)
The Consumer Discretionary SPDR (XLY) has come under some scrutiny as economic data from China continues to slow.
From our perspective, the China data will be overridden by domestic seasonal strength as the holidays and low energy prices put consumers in the buying mood.
That’s good news for the retail stocks in the XLY.
Strong technical support sits at the $70 mark for the XLY with an intermediate-term target of $80, which represents a potential 14% gain during the last quarter of the year.
Retail Stocks for the Seasonal Sweet Spot: Costco (COST)
The data suggests that Costco (COST) is a big winner for the season as the shares averages a move of just under four percent for each month from September through November.
The charts show that Costco has been holding relative strength against the S&P 500 through the volatility, with support looming at the $135 level should the market take another round of selling.
Our models are buyers of COST at current levels, with a target price of $150 by November.
Retail Stocks for the Seasonal Sweet Spot: Best Buy (BBY)
For the last five years, the analysts have been crying about how this brick-and-mortar retailer should be getting clobbered by Amazon (AMZN) and other online competitors and every year they fight back to win.
For the three months from September through November, Best Buy (BBY) shares average returns of just under 5% per month, putting this among the top technical stocks within the retailing group. As of this writing, the shorts had more than 10 times the average daily volume in bearish bets against the stock, indicating that a short covering rally is very likely.
The charts on BBY are strong, as shares just rallied above their 200-day moving average. To put that into perspective, there are only 24% of the S&P 500 can make that claim today.
The continued technical strength will get the shorts into the market to cover their positions, helping to push Best Buy toward our $45 target, a 20% move from today’s price.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
