The stock market took a little breather last week, but given how strong the rally was off the October lows, it was barely a blip on the radar screen. What does this mean? Is it telling us that the market is so strong that it doesn’t need much of a “breather” before it continues higher…or does it mean that the market will have to pullback further in order to digest those recent gains? It’s hard to know for sure, but it will be interesting to see if we get a big move this week…in either direction. Friday is the November expiration…and the effects of “gamma” work in both directions. Therefore, we could get an outsized move…in either direction…before this week is over.
Earnings season is coming to a close, but like it is every quarter, it won’t be completely over until we get the reports from a slew of retail companies. AAP, HD, WMT, LOW, TGT, TJX, ROST, BABA, FL, etc….all report this week. It’s interesting to note that the consensus on Wall Street keeps telling us that the consumer remains very strong. In fact, the cover story in Barron’s over the weekend was entitled “Retail Revival” (with the sub-heading, “Expect a record holiday season as mall stores stage a surprising comeback.”)………Of course, when the consensus opinion becomes a crowded one…so much so that it makes the cover of business magazines…it’s usually a sign of a top. Therefore, we need to be a bit careful this week when it comes to the retailers.
The other reason to worry that the upside for the retailers might not be a strong as the consensus believes is that consumer confidence is plummeting. The University of Michigan Consumer Confidence data that came out on Friday was MUCH lower than expected. In fact, it was the lowest reading since 2011…which means confidence is now even lower than it was at the depths of the pandemic.
Concerns over inflation seem to be the number one culprit when it comes to the significant decline in consumer confidence since June. However, no matter what the reason, there is no question that there is a WIDE divergence between what Wall Street is expecting from the consumer…and how confident the consumer is as we move into the all-important holiday selling season.
We are NOT saying that all of this means that the retailers cannot rally further. Rather, we’re saying that it’s not a lock. To be honest, we think the group will indeed rally…we’re just not as confident as the consensus on the Street seems to be right now. The good news is that the reactions to this week’s earnings reports should give us a lot of answers.
Looking at the technical picture of this situation, two important retail stocks stand at key technical junctures…and thus how they react to their earnings announcements should be very important as to how they act over the rest of the year. The two stocks we’re talking about are WMT and TGT. Both stocks had become overbought in late October…and both have seen mild dips since then. More importantly, both stocks are quite close to very important resistance levels. Therefore, if their earnings reports/guidance are disappointing, it will lead to a further decline…and tell us that the stocks have “failed” in their effort to “breakout.” However, if they rally on this week’s news…and break above their important resistance levels (their all-time highs), it will obviously be very bullish for the stocks as we head into the end of the year.
One thing that both stocks have going for them is that they are considered low-priced retailers (in terms of their merchandise). Therefore, if people are concerned about inflation…but still want to spend…these two retailers could pick-up market share during the holiday season. With this in mind, we’re leaning to a bullish outcome for these two stocks.
HOWEVER, since they have already seen very nice rallies since the early October lows, it will be essential to wait to see if they can above their all-time highs before we can confirm that the stocks are breaking out…..The good news is that their earnings reports could/should provide the catalyst for a decent size move in one direction or the other. Therefore, we won’t have to wait very long before we know how the situation plays out for these two key retail stocks (and likely for the entire group as well).
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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