Retail Stocks Struggle as Energy Prices Fall

The Friday after the U.S. Thanksgiving holiday is called “Black Friday” because it marks the beginning of the shopping season that traditionally pushed retailers into the “black” in terms of profits. While that isn’t necessarily the way it works anymore, the end-of-year shopping season is definitely critical for retail stocks. It’s one of the reasons many large retailers have an off-calendar fiscal quarter — so their fourth-quarter reports will capture the entire shopping season.

shoppingretailshoppersblackfriday185For example, Target (TGT) typically earns 22% more revenue in the fourth quarter than any other quarter, and an even greater percentage of TGT’s profit is earned during the same period each year. This is one of a few reasons that TGT took such a hit yesterday following its third-quarter earnings report.

Despite a mixed surprise, revenue is already down and expectations are flat. The all-important outlook for the fourth quarter was in line with analysts’ estimates, which may have been the primary issue that sent the stock lower.

TGT’s estimates for fourth-quarter earnings per share are roughly the same as they were last year. That’s not necessarily a bad thing, but investors like growth, not flat performance. One of the most important reasons that retail reports — including those from Macy’s (M) and Nordstrom (JWN) — have been so concerning this year is that, theoretically, consumers should be spending more as energy prices fall.

Typically, retail spending wouldn’t increase as energy prices fall because they are generally caused by the same thing — economic contraction. However, this time around is different. Energy prices are declining even though demand has been at multi-year highs in 2014 and 2015.

Energy prices are low this time because of a glut of worldwide production. However, as you can see in the next chart, retail stocks — as represented by the SPDR Retail ETF (XRT) — have instead been correlated with falling oil prices.

SPDR Retail ETF (XRT) versus US Oil Fund (USO)

Source: TradingView

SPDR Retail ETF (XRT) versus US Oil Fund (USO)

TGT’s bad reaction to earnings is just one more in a long string over the last two months that portends bad things in the retail sector for the end of 2015. This is an issue because U.S. consumers not only drive the U.S. economy, but they are also an excellent bellwether for what to expect internationally.

The market has been surprisingly defensive in the face of some of the bad news we have seen over the last week. Traders seem to be handling expectations for a rate hike (and somewhat surprising Federal Open Market Committee minutes) very well. So, while we aren’t expecting a break of long-term resistance on the major indices, the odds that there will be a big move to the downside also seem low.

We are currently biased toward a channeling market, which should present attractive opportunities for short-term option trades.

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.

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