As expected, given all of the recent downside volatility, my indicators continue to give very strong sell signals and are pointing to oversold conditions.
While these readings would normally be a reason to take a contrarian position and get bullish, I am still not ready to call a bottom in the market, as there are simply too many unknowns in this ongoing coronavirus situation.
The retail sector has been hit particularly hard during the COVID-19 outbreak, making the SPDR S&P Retail ETF (NYSEARCA:XRT) an excellent target for a bearish put option.
Nonessential retailers in different parts of the country are closing, and retail stocks carry a massive “headline risk” as a result. If the closure of nonessential retailers becomes nationwide, the entire sector will be hit hard.
How Long Will People be Staying in?
The Centers for Disease Control and Prevention (CDC) have recommended people engage in “social distancing.”
This includes avoiding gatherings of more than 10 people, staying six feet away from people in public spaces, limiting your travel and avoiding restaurants and nonessential shopping trips.
The word “nonessential” is causing problems. The federal government hasn’t ordered stores to close, but some local governments have told nonessential retailers to shut down.
GameStop (NYSE:GME) is an example of a retailer that is fighting against its own classification as nonessential. The company has told managers to refuse to close if local authorities attempt to shut down a location.
If debates like this continue long enough, we may see an effort to define stores’ roles and close down nonessential stores at the federal level.
Regardless, even partial closures in the U.S. will hurt the retail sector. And as long as people are avoiding public places, these companies will struggle.
XRT’s Bounce may not Hold
XRT jumped higher with the rest of the market yesterday, but as I said above, it’s too soon to call a bottom. Until the COVID-19 situation is under control, the market could reverse and head lower at a moment’s notice.
Daily Chart of SPDR S&P Retail ETF (XRT) — Chart Source: TradingView
Every time there is a new story of the virus spreading, the market seems to take another step lower.
There have been reports of success treating the virus with the anti-viral drugs chloroquine and hydroxychloroquine, which are typically used to treat arthritis and malaria respectively.
Unfortunately, until a vaccine is created, the best the U.S. can do is slow down the spread of the virus with social distancing practices. As more people embrace them, retailers will struggle.
Buy to open the SPDR S&P Retail ETF (XRT) June 19th $23 Puts (XRT200619P00023000) at $1.70 or lower.
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