While the stock market in general is roiled by the storm of headlines 2018, the retail sector is soaring. The SPDR S&P Retail ETF (NYSE:XRT) is up 25% in a year while the NASDAQ is barely up to 13% for the same period. Even among the retail companies, there are stock stars like Kohl’s (NYSE:KSS) and Macy’s (NYSE:M). KSS stock in particular is looking poised for a breakout on the long-term charts. And therein lies today’s thesis.
Perhaps retail’s out-performance is due to the fact that retail outlets are not directly exposed to the China tariff as manufacturers who sell their goods through them. Nevertheless the out-performance is there and within that there are winners.
This is evident on the weekly and monthly charts for Kohl’s stock. KSS has been knocking on the $81 per share roof for 16 years. Once it breaks through KSS stock should soar to $100 per share. This is not a short-term trade, so I should be ready to take some heat while it develops.
This will also need the help of the market in general. Investors are currently nervous about the U.S. Fed. The fear is that chairman Jerome Powell is looking to over-tighten the economy into a recession. I don’t think this is likely scenario. My bet is that he is in a battle of wills with President Trump and that too will abate in the next few months.
Then, there is the China fear. The U.S. is now engaged in a tariff war which could get a lot uglier in January once the rate escalates to 25%. But here too I expect that cooler heads to prevail. Both sides have a lot to lose.
So now we have two headwinds seriously affecting investments on Wall Street. But once one or both of these threats are gone, the buying will resume and Kohl’s stock will soar.
Why KSS Is the Current Best Bet in Retail
I chose KSS stock, over Macy’s for example, because of its relative strength to its highs. Macy’s is cheaper from a price-to-earnings perspective but the price action in the KSS stock is more exciting.
Buying a stock after a 15% rally in a month is risky, but that is how breakouts happen. Buyers bring the price up to a prior failure level and then they finally break through it. Once that happens they over-shoot as the sellers get tired of defending the roof line.
This is true for Kohl’s stock on the daily, weekly and monthly charts. So if the market in general gets another leg up, KSS has a good chance of doing it this time around.
But like I said this is a longer-term bet, so I need to be willing to sit on the stock for a while for this to develop. The downside risk is there but since the stock sells at a 17 P/E, owning it here is not likely to be a financial catastrophe.
There are also technical risks. If sellers succeeded at breaking the support at $70 per share, they could lose another 10% from there. But that will be another level of support where the bulls can find footing to remount the effort here-noted.
I don’t like chasing concepts that everybody else has been chasing for a while. Meaning buying into a retail stock after a sector-wide move feels frothy. But these are acting like momentum stocks and those are usually hard to trade. They never give us a clear point of entry so I have to set the fear aside and trade the technicals on the charts.
But that is only true as long as the macroeconomic environment stays favorable. If the world leaders decide to break these economies then this thesis is broken too and I have to stick to my stop losses.
Otherwise and within this macro, I expect this holiday season to be a strong one. The consumer spending is very healthy. This is a very strong jobs market sustaining this retail trend. So this is likely to continue in spite of fed actions.
Within the sector there would be winners and losers and so far KSS has been a winner. It has the Amazon (Nasdaq:AMZN) partnership which is likely to drive foot traffic into their stores. This also shows the flexibility of the management and what it’s willing to do in order to implement its plans for growth. This is evidence that KSS stock is in good hands for the long term.
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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.
