Pin the Retail Donkey (AMZN,XRT,HD)

Pin the Retail Donkey (AMZN,XRT,HD)

Pin the Retail Donkey (AMZN,XRT,HD)


We’re going to step out on a limb today and encourage you to consider the retail sales trade that we’re proffering hereunder.


It’s not an easy thing to buck the trend at a time when big name sellers are closing at their fastest pace ever all across this land, when companies like JC Penney and Macy’s and Sears are facing what could be their final breaths, and when traffic at malls across America appears to be drying up like a pack of seals stuck in a Saharan sirocco.

Whither the American Shopper…?


There’s no question that online sales are taking a bite out of the bricks and mortar retail group, with companies like Amazon obviously reaping the lion’s share of the new business.


In fact, e-retailing as a whole is looking to expand by some 14% this year, according to most estimates (compared to 13.1% in 2016), while traditional ‘in-store’ sales are figured to grow at the same 1.5% rate they did last year.  Department stores, alluded to above, appear to be moving in static fashion, looking for a break wherever they can find one.


But it’s less than likely that they will.


With store closures already announced, the die is cast and sales will almost certainly contract.


That said, prospects for the group as a whole are looking rosier.  According to the latest figures from the Commerce Department, retail sales grew in the latest period by 0.4%, less than analysts expected, but considering March’s revision higher, 2017’s sales results have been altogether positive.


Have a look here –

We haven’t been growing the numbers at the rate we saw last year, but three out of four months in 2017 have seen gains, and that, against a backdrop of well-publicized mall closings, should inspire many to believe in the continued strength of the American consumer.


As for the mood of that elusive creature, the chart below demonstrates that American shoppers are downright chipper about where they’re currently at – and where they appear to be headed.


This is the University of Michigan Consumer Sentiment Index, and as you can see, it’s holding stubbornly close to record highs – despite the naysaying news of the last few months on the retail front.

The latest read was 97.7, better than Wall Street’s expected 97.0, and spurring many to expect better growth numbers going into the next quarter.


Plans to spend generally augur well for real spending.


We’ll see.


What intrigues us most about these better than expected reads, however, is the performance of the underlying stocks.  For example, here is a chart of the SPDR S&P Retail ETF (NYSE:XRT) for the last three years –

The daily chart shows the rise to all-time highs in 2015, complete with all the moving averages unfurled and trending higher.


Then, after the peak was hit and price rolled over, the moving averages followed suit, reaching a fully unfurled state last summer.  We’ve been in bearish mode since then.


Until Now…


The current configuration is genuinely challenging, however, because all the moving averages have bunched together so closely that the next move for price is all but impossible to determine.


The question before us is – will the moving averages continue to unwind lower from here, reaffirming the current bearish posture, or will we see an unfurling higher, indicating a possible end to the decline that began in April of 2015?


To get a better idea of the dilemma we face, have a look below at the blowup of the most recent action (above, in blue) –

The green rectangle shows just how tightly the mid- to long-term moving averages have bunched.


And even though we’ve seen a roughly four percent decline on the part of the retailers over the last two trading sessions, we’re willing to consider that move a temporary one.


Where the group is headed next depends upon whether support at $40.50 holds (blue line).  If we break lower, chances are good we’ll continue to slide.  But if, conversely, price can manage to move above $43.50, THE POINT AT WHICH THE MOVING AVERAGES ARE CURRENTLY CONCENTRATED, then we’ll almost certainly see a reversal of trend, as the moving averages begin to unfurl northward and technical traders move en masse to stake out long positions.


So how do we play it…?


The best way of playing this kind of uncertainty is to pair it in a manner that pays off should one security outperform another.  That hedges us against being wrong by offering us more time to evacuate should the price move against us.


We’re never either winners or losers on such trades, just relative winners or losers.


Before we get to the trade, however, we have one to close.


It was opened on the 25th of April in a letter called Le Plus Que Ca Change…  There, we urged you to buy the HD September 15th 155 CALL for $5.50 and sell the HD September 15th 155 PUT for $7.35 for a total credit of $1.85.


And today, the Call is going for $7.75 and the PUT for $6.20.  Sell the former and buy back the latter and you net out $3.40 on nothing expended.  Adjusted for minimal commissions gives you a 2167% profit.


Ride it like the boogaloo!


And with hopes for more of the same, here’s this week’s initiative.


The pairing we’re using employs the above referenced SPDR S&P Retail ETF (NYSE:XRT) against world renowned (NASDAQ:AMZN).  And the rationale for the pair is as follows.


Should the retailers continue to show strength, there’s little doubt that Amazon will outpace the group, as sales numbers have for years been heavily biased in that direction.  Should there be weakness in the group, however, it’s more than likely Amazon stock will hold its own against the broader bricks and mortar based sector.


We’re going to play it on the PUT side, and the details look like this –

- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]

Note, too, that the long XRT PUT is at-the-money, while the AMZN PUT is more than $280 (30%) out-of-the-money.


With kind regards,


Hugh L. O’Haynew

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