In mid-September retail stocks were challenging critical levels and there was a brief opportunity to short that potential with a tight stop. So on Oct. 1, I shared an article that suggested potential bearish trades on three retail stocks in particular. They were Best Buy (NYSE:BBY), Target (NYSE:TGT) and the SPDR S&P Retail ETF (NYSEARCA:XRT). While it wasn’t a perfect setup for all three, it was a brief successful thesis given the details I provided then.
Today I revisited these three retail stocks that are back at the top of their ranges. They once again present bearish opportunities, but only if the current bullish setups they are sporting fail into 2020. The idea back in October was that these were tactical trades within the overall thesis. And as long as the investors held to trading the levels as noted back then, they were successful in these trades.
But today the same concept applies even as markets are making new all-time highs.
It is important to note that I am not a perma-bear as I have been on record supporting the idea of new highs even as the experts in the media were raising the alarm for an impeding recession. For months, my overall thesis on stocks has been that we will not have a recession or a sustainable equity correction for as long as we have full employment and a U.S. Federal Reserve that has put the safety net under us. There has never been a recession while we have full employment. So the U.S. economy would need to suffer a catastrophic shock to make that happen. Meanwhile, stocks are likely to meander higher while the bulls buy the dips.
With that in mind, let’s take a closer look at what makes each of these retail stocks worth shorting as we head into 2020.
Retail Stocks to Trade Into 2020: Best Buy (BBY)
In October, I cautioned against a potential drop in BBY stock and the scenario played out immediately as the stock fell 6% in mere hours. Nevertheless, it quickly bottomed near $64 per share and sprang into a 20% rally coming into its earnings today.
Year to date, BestBuy stock is up 40%, which is more than the S&P 500. This is no small feat for a retail stock since the XRT is dragging behind only up 7% this year.
This morning, BBY bulls got the good news they needed from management to continue this rally much like Target recently did. But Now it faces a prior failure level so the buyers will need momentum on this move to breach it. This is not the same as saying to short BBY with conviction. But it’s up to the bulls to prove that they can overcome the resistance this time around.
Unlike the equity market indices, BBY stock has not yet broken out of its roof from last year. This recent top near $78 per share is the sixth time it falls in that zone. So from a trading perspective, this is proven resistance until the bulls conquer it. To avoid accusations of lunacy, those with profits should insure them over the earnings event.
Conversely, the $61-per-share area has been support for a while, so I can assume it should hold without a nasty headline surprise. So from a tactical trading perspective, it is best to chase BBY stock if it breaches $78 per share and short it if it loses $61. Otherwise, dips into that support zone should be bullish entry opportunities.
Target (TGT)
TGT stock has been on fire. And it has been a champion among retail stocks. Year to date, it is up 89%. And even after going into its earnings precariously perched, management delivered a big enough beat that the stock set even higher highs.
This is in contrast to other retail disasters like the one from Macy’s (NYSE:M) and Kohl’s (NYSE:KSS). Consensus is now that TGT stock can do no wrong, and when this happens it isn’t usually an obvious place to start chasing it. If I am not long TGT, now is not an ideal place to buy it unless I am looking to own it for years.
In October, I noted the bearish trigger was if TGT lost $104, which it did not. So the short never triggered. In fact, I also noted that if the bulls set a new high, they would hit $120 per share, and that did happen. So this is the difference between a conviction trade versus a tactical setup. Knowing the technical levels that matter is a tool that all traders need in their tool belt.
For trading purposes, TGT is once again vulnerable to fill the gap at $114 per share. If that happens, it would make for a better tactical entry point, depending on the overall market sentiment. This would be the neckline from which it sprang on earnings. So far, $104 has been proven support, so it’s a good spot for bulls’ stop loss orders. This depends entirely on trader goals and timelines. Those who come late to the party are most likely to hold the red bag for a while. Just like in my October note, this is not the same as saying that TGT is a conviction short idea. It is a cautionary note to those who are not already long it. There is a bearish trigger below the $122 per share zone.
SPDR S&P Retail ETF (XRT)
Unlike TGT or even BBY stock, the XRT is an exchanged-traded fund, and it’s far behind the indices this year.
Even though markets are setting new all-time highs even this week, the XRT cannot break out of its recent roof around the $46 zone. It is still 15% below its all-time high that it set in March of last year. So there is definitely room for it to catch up to the general markets. But this is easier said than done and today’s point is to not expect that to happen on this round of earnings.
Earlier this month, the XRT bulls came close to breaking through the resistance neckline but failed on Nov. 7 at $45.41 per share. They need to muster up enough momentum to do it on this burst or lose the edge. Luckily that the seasonal trade is generally bullish into mid December. So the XRT still has a tailwind on this effort. Conversely, if the rally fails, then it becomes important for it to hold above $43 per share.
Otherwise, the XRT ETF becomes vulnerable to further downside from momentum sellers. In total, the retail sector has under-performed its potential. For every success story like TGT or even BBY there are dozens more losers.
So betting against the XRT is much easier than the other two. So those who know options can sell call spreads above recent fail levels, betting on them continuing to fail … but with proper stops. Otherwise, on a break below $44 per share, the sellers could start to gather momentum. If that happens, then $43 becomes critical to hold before a more severe target emerges.
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. Join his live chat room for free here.
