We're in the heat of earnings season for retail, and we're getting a feel for how well the consumer is weathering through the recent slowdown in the credit cycle.
That's right, the credit cycle, or what we will refer to as liquidity.
It affects us all, not just those multibillion-dollar corporations trying to finance equipment or buildings. It trickles all the way down to that piece of plastic in your wallet or purse - the credit card.
We've heard from a few retailers that consumers like you and I have pulled back on the purse strings.
Inflation and higher interest rates are slowing the consumer's spending, and that accounts for more than 70% of the economic activity.
So, like me, there are a few things you should be watching.
This is going to be a veritable battleground for the next two weeks.
If you're not careful, you just might end up a casualty. But if you're savvy, you can make a killing.
Well, I took some time to break down everything I'm seeing in the retail sector...
I really wanted to hit a sector other than the Retail group today, but the earnings season just won't allow for that to happen.
That's right, we're in the heat of earnings season, as we're getting a feel for how well the consumer is weathering through the recent slowdown in the credit cycle.
That's right, the credit cycle, or what we will refer to as liquidity.
It affects us all, not just those multibillion-dollar corporations trying to finance equipment or buildings. It trickles all the way down to that piece of plastic in your wallet or purse - the credit card.
We've heard from a few retailers that consumers like you and I have pulled back on the purse strings. Costco told us we were spending less on TVs and other expensive items. Home Depot and Lowes said last week we're doing fewer expensive DIY projects around the house.
Why? Simply put, it costs more! Inflation and higher interest rates are slowing the consumer's spending, and that accounts for more than 70% of the economic activity.
So, like me, you should be watching the next two weeks of retail earnings for two reasons:
- This is going to be the battleground trading sector over the next two weeks. Sure, there are a few companies in the tech and healthcare sector that will report during the same time, but the retailers OWN these two weeks, and as such, will be the "target-rich environment" for trades.
- The retail sector has good representation in the iShares Russell 2000 ETF (IWM). It's trying to break above its 200-day moving average (MA200), which would likely trigger a rally for the "risk-on" sector, as traders would start migrating back to this index. The retail earnings results will play a role in the IWM's ability to rally above that trendline and possibly cause a broader move higher in the market.
Here's your list of companies providing their results throughout the next few weeks, along with a few I'm targeting for trades (highlighted in red):
Now, let's dive into those targets a bit to get a sense of why they're highlighted on the above list...
CJ'S Retail Earnings Trade Watchlist:
Best Buy Co Inc (BBY)
The company will enter the earnings confessional Thursday, May 25 before the market opens. For months, it has been slowly suggesting its sales of large items, including electronics, are slowing. This, of course, is the source of much of the company's revenue.
Reading between the lines on my "Walk Down Main Street," last month's announcement that Best Buy was looking into creating a "membership service" to start bringing in revenue - assumedly to fill the gap from dropping sales revenue - was a danger sign for me.
Options traders have been preparing for a death blow to the stock, as the $68 put open interest has grown to a staggering 12,000 contracts. The next-largest put open interest strike, $65, has less than half of the $68's number of contracts.
That's how I see this post-earnings trade playing out. Weakness on the results breaks the $68 level for a quick Gamma Hedge to $65 - or a quick 6% drop.
Chewy Inc (CHWY)
The Blue Box is back in my neighborhood, but it's got some competition.
Chewy has been making some headway to get back on more porches after the post-pandemic economy dropped them like a bad habit, but the porch has been getting a little more crowded.
Walmart recently announced it was getting into the tele-vet business in a move to wedge itself into the growing pet-care field.
Last quarter, we saw Chewy beat expectations on the top and bottom lines, but the stock failed to rally after a wishy-washy earnings outlook on the call.
The options traders have drawn a "fair price" line in the sand at $33 and a secondary "value" at $30.
We're moving below the $30 level ahead of the earnings call May 31 after the market close. A break below this price is going to start a selloff to $28 ahead of the earnings call. After that, a target price of $28 becomes the next "line in the sand" for the stock.
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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.