In our Nov. 19 article, we wrote that the retail picture was looking worse as consumers headed into the holiday shopping season. We were concerned about several issues at that time and, unfortunately, none of them have improved much since then.
That may sound surprising considering that Cyber Monday set a new online sales record of $3.07 billion. However, that is probably not going to be able to do much to offset the 11% decline in sales on Thanksgiving and Black Friday this year.
As a review, the two charts below summarize our concerns. As you can see, the SPDR Retail Sector ETF (XRT) was rejected at its trend line resistance level, and oil is selling off again following a move down from $44 per barrel.
SPDR Retail ETF (XRT) versus WTI Crude Futures | Source: TradingView
Although Cyber Monday did set a new record for online sales (including mobile sales), the revenue came at the cost of serious discounts. For example, let’s revisit Target (TGT), which was the stock we highlighted last month as being representative of the retail problems we are concerned about.
Traffic to TGT’s website was so heavy on Cyber Monday that potential shoppers were actually prevented from adding items to their cart. This was largely due to TGT’s offer of 15% off all orders made online. The problem is that if you sell something at a loss (or an extremely deep discount), you may drive revenue, but you also threaten to upset your customers, which will curtail profits. According to Adobe’s web statistics, products were out of stock 13% of the time consumers attempted to make a purchase, which likely added to the frustration.
Cyber Monday Discounts Have Consequences
The end result is that we have retail companies trying to cut costs by minimizing inventory, risking the wrath of consumers when they are out of stock on hot items, while simultaneously cutting profit margins to push sales into a very small time frame at the end of the year.
The consequences of this poor strategy are evident in the next chart that shows how Target was rejected at its Nov. 13 gap with a “bearish engulfing” pattern on Monday, which was confirmed today with a lower close.
Target (TGT) | Source: TradingView
This is the same problem Alibaba (BABA) ran into last month following its deep Singles Day discounts and financing programs. If it hadn’t been for the People’s Bank of China (PBOC) promising additional easing, BABA’s decline in November would have continued.
The underlying issue remains the same. Consumers are not spending the income they have saved from lower oil prices at the rate we would have otherwise expected. Some of that is probably due to the fact that consumers in the U.S. are on track to purchase a record number of cars this year, which is good, but it also disproportionately restricts the credit and income available for other purchases. There are also concerns that higher interest rates will increase the cost of consumption and capital in the near future.
Like it or not, the U.S. economy is consumption-driven. If that measure continues to trend lower, it is likely that North American stocks will remain under resistance and the risk of a correction will rise. In turn, that should continue to push on commodity prices and emerging markets as well. There are some interesting bright spots in the retail sector, but investors should be very choosey about where they place their bullish trades.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, 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.
