Last year, trading the retail sector was challenging because the whole market sentiment was very sour for the latter part of the year. So far, 2019 has been the exact opposite. The bulls have been in complete control and the buy-the-dip gang is back in charge. Walmart (NYSE:WMT) stock is up 11% year-to-date. It has mounted a 20% rally off the December lows. Yesterday, management reported earnings and investors rejoiced. WMT stock spiked then faded into the close but it was still up 2% on the day.
So the long tail it left in the daily candle leaves some doubt among critics that it can maintain the spike and build on the momentum.
Walmart is a great American company but at these levels there are better entry points. There are two coming up soon so I’d get ready for either.
Now Walmart stock is close to an important trend line of lower highs. Because they are also setting higher lows means that this is an opportunity for the bulls to break out even further from here. However, they first need to prove that they can overcome and break this descending trend line.
Otherwise they could fade to fill the gap below and retest levels near $96 per share. Even if this happens, it would still be inside normal trading price action. It would not be alarming and won’t change the fact that Walmart is still executing on plans flawlessly as it has for decades.
Recently, the December retail report struck fear into investors, but I believe this was a mistake. The change in the data was too sudden and too far outside the expectations for it to be correct. The report covered December when we had the U.S. government shutdown and extremely nasty sentiment on Main Street and on Wall Street. So it’s likely to be a one-off and not the trend for retail.
We’ve seen several retailers prove this and Walmart earnings is the biggest most recent one. Management over delivered on most metrics and guided well into next quarter. So for now, I will take their word for it being that they are the largest retailer on the planet.
Fundamentally, Walmart stock is no longer a bargain. It sells at a price-to-earnings ratio of 44 which is nearly double that of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Costco (NASDAQ:COST) stocks. This is also more than triple that of companies like Target (NYSE:TGT). So clearly from a valuation perspective, this is not an obvious entry point in Walmart stock.
How to Trade WMT Stock Today
Now before you label me a perma-bear, I’ve only traded Walmart on the positive side but from much better entry points. It was easy for me to make bullish bets when everybody was hating on it in below $85 per share. But up here at these levels, I’d rather wait for a dip or a breakout.
If Walmart dips to more attractive levels, I would go long WMT stock for a swing trade. Conversely, if the bulls manage to break out of the new descending trend line, then I would also go long WMT stock for a tactical trade to chase the breakout toward $115 per share. Until then, I let them fight it out here without my money.
Walmart stock will need to help us in the general market. Currently, we are approaching several deadlines, which will become trigger headlines soon. The U.S. and China are negotiating on the tariff situation in order to avoid 25% tariffs on Mar. 1. We also have politicians fighting over budgets and funding here in the U.S. So the outcome of these battles is still binary, which adds to the guessing part of investing in WMT stock right here.
Moreover, the sentiment is important and although it is much improved in 2019 on Wall Street, the rhetoric from experts in the media is uniformly expecting a dip in stock prices. Convention is that we’ve come too far too fast, this may become a self-fulfilling prophecy. The S&P 500 has several support levels below, so even if we dip, I would consider the price action as normal. Above current levels, the S&P 500 has a magnet around 2,825, where the bears will want to make their stand as they have two times before.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
