Although a surprise winner during the malaise that was Covid-19, athletic apparel retailer Foot Locker (NYSE:FL) is practically on life support. Since the beginning of this year, FL stock has plunged almost 44%. So far, it has demonstrated little in terms of positive narratives, save for perhaps the nearly 5% move in the trailing week.
It raises the question: is this the beginning of a meaningful recovery or a temporary respite before another big drop?
To provide a quick blast of how get into this mess in the first place, one of the major problems was Foot Locker’s overreliance on Nike (NYSE:NKE), along with shifts in partnership dynamics. Historically, Nike accounted for most of the retailer’s merchandise. Unfortunately, the brand’s strategic pivot toward a direct-to-consumer (DTC) model greatly reduced volume at Foot Locker, along with the prestige of exclusivity.
Another factor is more macro-related: the decline in consumer demand and burgeoning economic pressures. Sure, the post-pandemic environment brought some temporary opportunities for Foot Locker. However, the negatives of the crisis — such as rising inflation and the subsequent reduction in discretionary spending — came back to hurt FL stock.
As well, Foot Locker wasn’t the only player in town. With rising competition in the space, the once-proud retailer quickly lost market share. Combined with operational challenges and certain strategic missteps, smaller problems compounded into larger ones, taking a bite out of FL stock.
It’s a mess. At the same time, the market really comes down to one question: are you in or out?
It’s an underappreciated fact but in many ways, the Russians forwarded the concept of applied probabilities. Back then, the Soviet Union was obsessed with decision-making models deployed under duress. What make a probabilistic forecasting system distinctly Russian is the underlying pragmatism.
Stated bluntly, the Russians love to develop things that are too stupid to fail.
Perhaps the most Russian of all processes is the Markov chain. Under its first-order application to the stock market, the system is elegant in its simplicity: consider only the discrete events of demand or no demand and their sequencing. That’s it. Without incorporating myriad other indicators, stochastic oscillators and other nonsense, the failure points are few.
In other words, we don’t care about interest rates and foreign currency fluctuations or anything else — just demand or no demand.
Using this framework, it’s easy to identify that FL stock, over the past 10 weeks, printed a “2-8” sequence: two weeks of upside interspersed with eight weeks of downside. This is the rarest sequence on record for FL over the trailing decade, having materialized only four times.
The kicker? In three out the four instances, FL stock popped higher in the following week. Further, there’s no 1-9 sequence on record, at least in the trailing decade. This is it. Foot Locker is flashing a reversal signal that must go through. Otherwise, circumstances can get really ugly.
Two main pathways are forecasted, with both expected to encounter turbulent weather. Over the next 10 weeks, assuming the positive pathway, FL stock could reach a median price of $12.48. Ultimately, the end price could be much higher — it just depends on how circumstances pan out.
As for risks, the concern would be a drop below $10 over the next two month period. If that happens, Foot Locker could end up in a death spiral.
