As goes the U.S. consumer, so goes the U.S. economy. Bur trying to decipher the strength of the U.S. consumer by merely looking at some of the top performers in the retail space (what we have dubbed the U.S. Consumer Teflong™) like Disney (DIS), Facebook (FB), Home Depot (HD), Nike (NKE), Starbucks (SBUX) and of course Apple’s (AAPL), is using the wrong gauge. These stocks are in a league of their own and they will be the last battle fought in this bull market.
Just as it’s important to recognize this groups’ relative outperformance, I think it is important to note a recent loss of leadership. Two stocks that should be acting better, Costco (COST) and Walmart (WMT), given the perceived wealth effect from a stock market near all time highs, housing prices and employment data back towards pre-crisis levels. Both stocks made new all time highs in Q1 and are now down 14% and 22% respectively since, at 8 and 12 month lows. Despite COST paying a $5 special dividend in early February, the stock remains in a steady downtrend from its post dividend highs in March, now down 12.5%:
This chart is a train-wreck in my opinion. The stock was consolidating for the first half of the year, until its epic breakout that yielded an almost 50% gain to new all time highs from its lows in the spring, only to fall by the wayside this spring. The reversal from bull market leader to laggard in a market less sure of itself suggests that the break below the uptrend could cause the stock to roundtrip the entire one year move.
Wlamart (WMT) is in the same sector and also had an epic breakout to new all time high earlier this year. Since, it’s not only re-tested the breakout area on the downside, but broke down form there and is now making new two year lows:
And then there’s Target (TGT) also in the same sector but the only one demonstrating impressive relative outperformance in 2015, having just made new all time highs last week. It’s been unable to hold the gains recently as the broader market has sold off. But it’s still up 8% for the year:
It’s easy to argue that TGT’s poor relative performance in late 2013 and most of 2014 is the result of a massive data breach, suspension of share buybacks and a management shakeup. But since the company’s move to shutter their money losing operations in Canada we’ve seen signs of a shift in investor sentiment as we’ve witnessed progress in their online business and the reestablishment of the buyback.
My thoughts on that is that the latter has merely helped the stock play some catch up. The reasons for COST and WMT weakness has little to do with anything going on at TGT but the stock will likely follow their failed breakouts in the weeks/months to come.
The next identifiable catalyst for TGT will be their fiscal Q2 results expected in the third week of August, which should fall in Aug expiration. Options prices look fairly cheap relative to low levels of realized volatility, and long premium direction trades could be the way to play for a pullback to the mid $70s:
[caption id="attachment_54951" align="aligncenter" width="600"]
TGT 1yr chart of 30 day at the money IV (blue) vs 30 day realized vol (white) from Bloomberg[/caption]
With the stock down a few bucks since the failed breakout it would feel like a press to put on a bearish position here, as a bounce and failure below the prior highs would be ideal.
One trade I would consider with the stock at $81.80 is the following, playing for a short term move back to $80:
Hypothetical Trade: TGT ($81.80) Buy July 82.50/80/77.50 Put Fly for .60
-Buy 1 July 82.50 put for 1.65
-Sell 2 July 80 puts at .65 each or 1.30 total
-Buy 1 July 77.50 put for .25
Break-Even on July Expiration:
Profits: of up to 1.90 between 81.90 and 78.10 with max gain of 1.90 at 80
Losses: of up to .60 between 81.90 and 82.50 & between 78.10 and 77.50 with max loss of .60 below 77.50 and above 82.50
Rationale: This spread is in the money, placing a break-even above current levels in the stock which helps mitigate decay while targeting near term support as a level the stock could pause at if the it were to continue to decline.
We will take a closer look at ways to play into Q2 earnings with a mid $70s target on any bounce.