- Nike (NKE) shares are topping the leaderboard Thursday, gaining nearly 5% even as the rest of the market sinks.
- Lululemon (LULU) shares broke out on Wednesday after the athletic apparel company announced its trade-in and resale program details.
- The price action in Target (TGT) has turned bullish and suggests more upside to come.
Retail stocks are heating up and the relative strength is becoming too powerful to ignore. The gains in today’s trio stand in stark contrast to the weakness seen in the broad market. The S&P 500 hasn’t been able to piece together a two-day rally since peaking on Mar. 29. The absence of a sustained lift makes for a challenging backdrop for buying stocks or deploying bullish trades.
But if you’re going to go shopping anyway, these retailers deserve top consideration. I find their ability to rise in the face of the general apathy toward equities right now inspiring. Indeed, it could mean more gains are in store.
Two of the three stocks I have chosen have completed long-term trend reversals. And the third is following in their footsteps. Let’s look at each and map out an intelligent options strategy to profit. Here are my top three picks of retail stocks making a swift recovery:
| NKE | Nike, Inc. | $127.49 |
| LULU | Lululemon Athletica Inc. | $390.78 |
| TGT | Target Corporation | $237.20 |
Retail Stocks Making a Swift Recovery: Nike (NKE)
Click to Enlarge
Nike (NYSE:NKE) is in the earliest stages of its reversal attempt. Before Thursday, you couldn’t have interested me in the stock, but after jumping close to 5%, the turnaround attempt is mature enough to play. We now have a higher pivot low in place and have pushed back above the 50-day moving average. The last breakout bid failed, but this time we’re attacking the 50-day from a much higher vantage point.
Specifically, NKE stock just completed a higher pivot low and is only up two days. That leaves plenty of gas in the tank for follow-through. Volume swelled past 200% of the average daily turnover, suggesting big buyers rushed in. Notably, Nike held onto its gains even as the broad market selloff accelerated into the close.
If we can take out Thursday’s high of $134.38 on Monday, bull trades are worth a shot.
The Trade: Buy the Jun $135/$150 bull call spread for $4.50.
You’re risking $4.50 to make $11.50 if NKE stock tops $150 by expiration.
Lululemon (LULU)
Click to Enlarge
Wall Street celebrated last month’s earnings report in Lululemon (NASDAQ:LULU) by sending shares soaring to a three-month high. Since then, we’ve seen prices pause to create a high base pattern. The 200-day moving average marked the top end of the range, making it the obvious level to watch for the next breakout.
It arrived yesterday alongside welcome news.
The company announced a trade-in and resale program called “Like New” that allows customers to cash in gently used apparel and receive store credit. The clothes would then be sold at a discount, potentially bringing in a new range of consumers that were previously unwilling or unable to pay for Lululemon’s high-end apparel.
Time will tell how much impact the program has on earnings. For now, it is creating buzz and aiding buyers in the breakout bid. With LULU stock now above its moving average, bulls can swing away with confidence.
The Trade: Buy the Jun $400/$420 call spread for $8.
You’re risking $8 to make $12 if LULU tops $420 over the next two months.
Retail Stocks Making a Swift Recovery: Target (TGT)
Click to Enlarge
Target (NYSE:TGT) shares many similarities to LULU and is the final of today’s retail stocks to buy. Recoveries built on better-than-expected fundamentals are always more sustainable than those built on fluff. Both Lululemon and Target saw their downtrends stopped dead by first-quarter earnings. Target’s release was good enough to deliver a one-day 10% gain to the stock.
Prices subsequently paused for six weeks to digest the gain and build a base for further increase. We’ve since broken out. On Friday, the rally continued, pushing prices up another 1.5% and piercing the 200-day moving average for the first time this year. Volume patterns weigh heavily in favor of buyers and support more upside.
The Trade: Buy the June $240/$260 bull call spread for $6.70.
The max loss is $6.70 and the max gain is $13.30.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
