How I'm Trading Retail with Earnings Around the Corner

Here we go, the earnings season is finally setting its sights on the retail sector, as companies like Home Depot Inc (HD), Walmart Inc (WMY), Target Corp (TGT), and TJX Companies (TJX) start providing their results and guidance.

Just like the large-cap tech index, the Nasdaq 100, the retailers' earnings come as concentrated waves, indicating SPDR S&P Retail ETF (XRT) is about to become a "trade-rich environment."

The breakdown of the XRT shares is one of the more equally weighted out there. For example, Walmart is the largest retailer in the country; Kroger is the second largest.

Well, the two largest retailers in the country only represent about 2.5% of the XRT's total weight. This is a stark difference from the QQQ weighting, which more heavily favors the largest companies.

Put more directly, it is harder for any five or six companies to induce a rally in the sector given its more equally-weighted nature.

Here's a quick technical breakdown of the sector as it stands today...

XRT Chart: The technical picture for the overall sector is not bullish. In March, the XRT's 50-day moving average (MA50) rolled over into a bearish trend. This indicates the sector has a lower price target over the next four-to-six weeks.

The last trading day of April saw another bearish pattern form, as the MA50 crossed below the 200-day moving average (MA200). This is referred to as a "Death Cross," as it often indicates a stock or ETF is gaining long-term momentum to the downside.

The last Death Cross on the XRT shares occurred in January 2022 and led to a 30% decline over the next three months.

Do I think we're in for another 30% from here? The answer is "no," but things could get bumpy... especially at the company-by-company level.

As of now, 37 of the 88 stocks that make up the XRT shares are trading above their respective MA50s. That puts about 60% of the sector under their key MA50s.

Here's a quick look at the "leaders" among the XRT...

On the other side of the coin, here's the list of the top 10 companies trading below their respective MA50s.

Of course, I'm not going to stop there. Let's drill down on the sector for a bull and bear trade...

Bullish XRT Pick: Kroger Co (KR)

Discretionary spending is the first thing on the block when it comes to the retail sector.

Companies that sell items that are higher on the "needs" list are those that are showing strength against others. This is where Kroger comes in.

The second-largest retailer in the country, Kroger has been outperforming the largest retailer in the country, Walmart, as it returns to its leadership role.

I've referred to KR as the "Technology of Grocery" for a reason... The company remains on the cutting edge.

Expansion into new markets with the acquisition of Albertsons Companies Inc (ACI) will help the grocer, but it's the company's organic growth by way of growing its own logistics chains that makes the stock attractive.

From a technical perspective, KR shares are breaking into a stronger bullish pattern as the stock moves back above its 20-month moving average. That's right, this retailer is in a technical bull market.

The $50 price has provided resistance for shares over the last two months, but that looks ready to change. The Bollinger Bands have tightened to the point where volatility is ready to charge the movement of the stock, and the directional bias from the trends heavily weighs shares to move higher.

Target (no pun intended, retail nerds) a move to $60 on KR shares using the July $50 calls.

Bearish XRT Pick: Etsy Inc (ETSY)

On the other end of the "needs" spectrum is Etsy.

The tchotchke peddler is clearly in the "wants-not-needs" category when it comes to the retail group, and it's likely to get worse. This is based on the declining demand for truly discretionary goods.

The stock is trading in a decidedly bearish pattern with all three of the major moving averages (20-, 50- and 200-day) trending lower. As of today, the stock is tapping on the $92 level, which has held for the last week, but that's likely to change, as we're now seeing the options market shift their targets on the downside risk for ETSY.

The analyst community is doing the same, as Morgan Stanley just came out with a price downgrade on the stock. Get used to it. The current Wall Street estimate (price) is just under $140, with a high target of $170. These price targets will adjust over the next month, putting more pressure on the stock.

With earnings coming in at the end of July, ETSY shares have time and room to move lower to my $80 price target.

The post How I'm Trading Retail with Earnings Around the Corner appeared first on Penny Hawk.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

Read full bio