Last week was a big week for the market. No, scratch that, it was a huge week for the market.
Investors are breathing a huge sigh of relief after results of the presidential election provided certainty on who will be the President of the United States in January.
Remember, the markets thrive on certainty. An uncertain outcome from the presidential election would have tossed stocks and bonds into a tumultuous situation that would have combined volatility with uncertainty.
Now that the market is set to move forward, it’s time for a seasonally powerful trend to take over.
The period from Labor Day through Black Friday is best known for its seasonal retail sector trade.
This seasonality is so strong that we used to call it the “Holiday Bonus Trade” as money managers would earn their Holiday Bonuses from the “Alpha” generated from this trade alone.
With the election tensions out of the way, we’re already seeing the seasonality of the retail sector trade in motion.
This rally is likely the catalyst for what should be a strong second half of November. That’s because the seasonal trade is now kicking into full force.
Over the next two weeks companies like Home Depot (HD), Lowes (LOW), JW Nordstrom’s (JWN), and Best Buy (BBY) will release their earnings results. The same wall of worry that is in place for the market is even higher for these stocks, which is why I see some opportunities.
As a group, the retail sector is up 12% for the year. Compare that to the Nasdaq 100 (QQQ) which is up more than 26% and you’ve got the potential for a real “slingshot trade”. Investors are going to be looking for relative values in the market and this is a target-rich environment.
Last week’s reaction to the election results rallied the retail sector almost 5%. That performance put it in the middle of the pack for the market, but the retail sector has something that most of the market doesn’t have…. Approaching earnings.
This week alone, more than ten big names in the sector will report their quarterly earnings results.
In general results for retail companies have been improving.
Consumer sentiment is on the rise as most of us are feeling relief from inflation and high energy prices over the last year.
Consumers are also looking forward to 2025 and seeing signs that the economy is set to get stronger.
All reasons that retail companies are likely to provide a strong trend through the end of the year.
The drivers are in place, all that is needed is a catalyst... Earnings
Home Depot heads into its earnings announcement on Tuesday morning with the backing of a a strong bullish trend.
Shares posted a strong 23% rally after Home Depot’s last earnings report.
That report showed an improvement in both earnings per share and revenue following a slower-than-normal quarter prior to that.
The first half of Home Depot’s year was spend overcoming consumer’s fear of buying as interest rates remained high and the Fed appeared to have no timeline for lowering them.
Now, with the Fed forecasting lower rates into 2025 and inflation having been curbed, consumers are back in the stores spending on larger items.
Analysts are looking for earnings per share of $3.65 this quarter along with revenue of $39.29 billion.
It is notable that both of those numbers have been lowered over the last two quarters.
This gives Home Depot more room to impress with an earnings report that beats lowered expectations.
That, combined with the seasonal strength of the retail sector targets a move to $500 for Home Depot shares.
The best approach to the retail sector is to stick with what has been working.
Walmart (WMT), Target (TGT), and Costco (COST) represent the leadership and momentum plays. We'll talk more about these as their earnings approach next week.
As for the Retail ETF (XRT), this is the best way to invest in a wide swath of retail stocks with one easy share.
This ETF also trade options, so those with an education and background in options trading may want to consider long expiration calls to allow the retail sector's strong trend to work in your favor.
As for Home Depot, with the company's earnings approaching on Tuesday morning, investors may want to that the wait and see approach with the strategy of looking to "buy the dip".
Shares currently trade at $410 with significant support at $395 from the stock's 50-day moving average. That trendline offers the perfect support for investors looking to buy the dip on these shares after its earnings report.
