Nearly 55% of the S&P 500 (SPX) have reported calendar Q3 earnings so far. Here’s a quick scorecard with some projections from FactSet’s Earning’s Insight:
Far from a disaster, as a whole, but the SPX is down about 2.5% from the start of October, and about 4.5% from its all time highs made in August. A big component has been the loss of some mega-cap leaders like AAPL, AMZN, FB & GOOGL in the last couple weeks. For the most part we have gotten throught the bulk of tech and financials earnings, which combined make up about 50% of the SPX and most large cap energy which is about 15%. Next week will start retail earnings, with department stores like Macy’s (M), JC Penny (JCP), Kohl’s (KSS) & Nordstrom (JWN), followed by Home Depot (HD), Lowe’s (LOW), Target (TGT) & Walmart (WMT) the week after. If the price action by Costco (COST) since reporting Oct comp store sales is any indication how retail stocks will react to better than expected sales, then the sector is in for a rough patch into the Holiday season:
While the stock might find near term support at $140, and below the long term uptrend which is a most hold:
Which brings me to the XRT, the S&P Retail etf, which back in late September we expressed a bearish view in the sector looking out to Jan expiration, targeting a move below $40. Here was the trade from September 29th:
*XRT ($43.15) Buy Jan 43/37.50 put spread for $1.35
- Buy 1 Jan 43 put for 1.80
- Sell Jan 37.50 put at 45 cents
With XRT $41.50, this trade is now worth about $2 vs the initial $1.35 cost basis. With the spread now in the money, it makes sense to take another look at the trade set up as many of its components are set to report and guide in the coming weeks before the all important holiday season. First things first, retail stocks (measured by the XRT) have dramatically under-performed the broad market year to date, down 11% from its 52 week highs made last November, and down 4% on the year, never keeping pace with the index, down nearly 20% from its all time highs made in March of 2015. The five year chart is a textbook head and shoulders top, with $40 being the neckline:
If I were approaching this new (update below for existing readers) I would look for near the money participation, while helping to reduce the premium at risk by selling a downside put at technical support:
*XRT ($41.45) Buy Jan 41.50 / 35 put spread for $1.45
- Buy to open 1 Jan 41.50 put for 1.70
- Sell to open 1 Jan 35 put at 25 cents
Break-even on Jan expiration:
Profits: between 40.05 and 35 of up to 5.05, max gain below
Losses: up to 1.45 between 40.05 and 41.50, max loss of 1.45 or 3.5% above 41.50.
Rationale: this trade targets the neckline as the break-even with a 3 to 1 profit potential below.
Update to existing positioning:
At this point we want to roll some of the gains in this position.
UPDATE:
- Sell to close 1 Jan 43 put at $2.50 and
- Buy to close 1 Jan 37.50 put for 2.50
Resulting in a 65 cent profit.
Roll that
- Buy to open 1 Jan 41.50 put for $1.70,
- Sell to open 1 Jan 35 put at 25 cents
Resulting in a $1.45 debit
New Position: XRT ($41.45) Buy Jan 41.50 / 35 put spread for 80 cents, including the 65 cent profit from the roll.
Rationale: we have reduced the premium at risk, while widening the profit potential.