Earnings season is breathing new life into retail stocks. Turns out the prophecy of death and destruction for brick and mortar is greatly exaggerated. Or, it has at least lowered the bar so far this quarter that beating expectations was a breeze this quarter. Either way, the latest earnings from Wal-Mart Stores Inc (NYSE:WMT) to Foot Locker, Inc. (NYSE:FL) and Abercrombie & Fitch Co. (NYSE:ANF) have the SPDR S&P Retail (ETF) (NYSEARCA:XRT) hopping.
XRT is up 2.5% in early morning trading vaulting above critical resistance zones. Retail lovers the world over are finally starting to get some reciprocation from Mr. Market. We’ve certainly seen rebound attempts in XRT before. The floundering sector has tried to pull out of its tailspin many times. But at the risk of jinxing the current reversal, I think this time’s different.
Let’s first consider the weekly chart. The downtrend gripping retail stocks finally formed a higher pivot low just last week marking a significant change in character. For the first time in months, buyers stepped up and created support before XRT fell to new lows.
While the weekly timeframe has yet to break fully into an uptrend, the formation of a higher pivot low sets the foundation for such an eventuality.
Today’s pop is carrying XRT back above its 200-day moving average for the first time since May. Couple that with its clearance of the horizontal resistance shown below and this is the best chance in ages that bulls have had to create a bona fide trend reversal.
While the sector may experience some backing-and-filling over the coming days as profit-taking strikes, it’s probably safe to view dips in the space as buying opportunities.
The Retail Recovery Trade
Traders looking to buy XRT on any and all dips can use options to get paid for their willingness. The strategy is known as a naked put. For example, if you’re a willing buyer of XRT in the $40.50 zone, you could sell the Dec $41 put for 70 cents.
If the retail ETF sits below $41 at expiration, then you’ll be obligated to buy shares at a cost basis of $40.30. On the other hand, if XRT remains above $41, then you’ll pocket the 70 cent credit. The initial margin for the trade is around $700 to $800, so capturing $70 reward (70 cents x 100) is still an attractive 10% return.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.