The risk-on rally heated up last week, with small-capitalization stocks exploding ahead of the weekend. Of course, upside from the little guys isn’t new. They’ve been rocketing higher ever since the novel coronavirus vaccine news struck in early-November. In today’s gallery, we’re exploring the best retail stocks to buy.
Retail was a left-for-dead industry that now finds itself full of small-caps that are rising from the ashes.
One of the beautiful dynamics playing out over the past few weeks has been rotation. Every sector and market cap eventually has its day in the sun. Once cold areas eventually warm up, and those that are red-hot eventually cool. Savvy traders are always on the lookout for these signs because it can help them get in on the ground floor of a new trend.
I’ve scoured the retail industry and found three picks worth your attention. The lot of them look delicious heading into Christmas.
After chronicling their bullish technicals, we’ll serve up a smart trade idea to capitalize.
3 Retail Stocks to Buy: Abercrombie & Fitch (ANF)
In late August, Abercrombie & Fitch finally climbed above the 200-day moving average, and it hasn’t looked back since. At just over $22, ANF stock has now climbed around 200% from its March low, breathing new life into an industry that was whipped and abandoned during the global pandemic. Given the strength of the rise, the 20-day and 50-day moving averages are zipping higher.
Profit-taking delivered a pullback last week that’s giving dip-buyers a chance to pounce. So far, they’ve responded, and prices are stabilizing above the 20-day moving average. The last four candles formed lower shadows to confirm bulls have consistently swarmed intraday.
The cheap price tag makes a straight stock purchase possible, but if you want to elevated your odds, try this options trade instead.
The Trade: Buy the Feb $20 call while selling the Jan $24 call for a net debit around $2.20.
Urban Outfitters (URBN)
Urban Outfitters has closely mirrored the flight path of ANF, and that makes it a worthy pick for the second of our retail stocks to buy. From a percentage perspective, it has stopped short of its predecessor’s massive gain. But at 132%, the ramp from the lows is still impressive.
What I particularly like is the increasing momentum seen during last month’s ascent. The high-volume pop reveals strength beneath the surface and raises the odds of the current dip getting bought.
So far, the 20-day moving average is holding as a support zone. Friday ended with a hammer candle and suggests the next upswing could be imminent. I like using Thursday’s high of $28.70 as a trigger for new entries. Here’s my preferred spread if you’d rather use options instead of stock.
The Trade: Sell the Jan $24 puts for 50 to 60 cents.
Nordstrom rounds out today’s trio of retail stocks to buy with a price that just doubled in three weeks. It’s as if investors suddenly awoke to the idea of an economic rebound. In that scenario, JWN stock doesn’t deserve a share price of $10, but something far higher. Not one to wait, the Street is rapidly pricing in this new reality.
If they fully correct March’s rug-pull, then we could see Nordstrom shares return to $40. In the short run, there’s no denying that prices are extended. While ANF and URBN retreated last week, JWN did not. Instead of chasing new entries, I suggest either waiting for a pause to create lower risk entries, or selling puts.
The latter idea allows you to get paid for your willingness to acquire shares at a discount to Friday’s closing price.
The Trade: Sell the Jan $25 put for 75 cents.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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