Name That Trade – $XRT: Retail Therapy

by Dan May 11, 2015 2:18 pm • Commentary

Generally, I look to experts to get direction on things in financial markets outside of my wheelhouse. That’s why this story from the WSJ this mornings was fairly enlightening on how to think of the impact of oil prices on U.S. corporate earnings for the next 10 years:  OPEC Sees Oil Price Below $100 a Barrel in the Next Decade, in a word they should have a benign impact (sarcasm font needed).

Regular readers know I was not a huge fan of the notion that lower gas at the pump was the equivalent to a tax break for strapped U.S. consumers (this was not confirmed in retail sales data over the last ten months).  I have been informed on more than a few occasions that the benefits for consumers of lower gas usually takes about 9 months from a peak, which is interesting because that would have almost matched the period from the 52 week highs last summer to the recent lows:

NYMEX Crude Oil Future  1yr chart from Bloomberg
NYMEX Crude Oil Future 1yr chart from Bloomberg

While this does little to demonstrate lower oil benefit to consumers, it highlights the volatility of the underlying commodity, crude was off 60% from its 52 week highs after 9 months, and now is up 40% in the last two months. That demonstrates the difficulty in making blanket assumptions about the potential benefits/headwinds of lower/higher oil to consumers in an attempt to extrapolate the benefit/lag to U.S. corporate earnings……what should be the primary driver of stock prices.

But put together with a few other macro factors, we could be entering an environment that could present challenging headwinds to corporate earning vs Q1. Crude is up 40% from its lows, yields on 10 yr Treasury are up 30% from their lows in Q1, and while the US Dollar (DXY) is down 5% from the March highs, it is still up 20% from the 52 week lows. That combined with what was likely a contraction in Q1 GDP, and April Jobs just bouncing back to trend, we better see a bounce back in retail sales (reported Wednesday) and more optimistic guidance from what is to be a plethora of retailers in the coming weeks (M, TJX, HD, LOW, WMT, TGT  & COST to name a few).

Which leads me to take a look at the XRT, the S&P Retail etf, which had been in a beautiful uptrend from the 52 week lows made in October, advancing 28% to new all time highs in late March.  Since the highs the etf has lost momentum, making a series of lower highs and lows, and never confirming the April 27 new high the S&P500:

XRT 1yr chart from Bloomberg
XRT 1yr chart from Bloomberg

In the near term $100 could serve as technical resistance and if it were to fail here the next test would like be last weeks low of $96.23 and then little support till the low $90s.

Potential Trade: If I were inclined to make a near term bearish bet on a failure at $100, I could consider paying $2.40 for the June 100 puts (stock ref $99.50).  These puts are 50 cents in the money and risk 2.4% of the underlying stock price and break-even at a level where the etf was trading just 3 trading days ago. I don’t want to be early on this trade, and want to see if the etf can get through $100 first.