It's just 11 days and counting until Black Friday and the official start of the 2018 holiday season. Traditional storefronts and e-commerce should post exceptionally strong results this year, underpinned by rising wages, bullish economic sentiment and the strongest job market in decades. Even so, many retail stocks have failed to respond to these strong fundamentals, buffeted by an intermediate correction that has affected broad swaths of the market universe.
Stock pickers could profit from the divergence between price and short-term outlook, picking up shares of well-positioned retail plays ahead of the media circus that inevitably surrounds Black Friday. Notably, brick-and-mortar operations may offer stronger returns than pure e-commerce plays in this environment due to the overhang of exceptionally weak Amazon.com, Inc. (AMZN) price action, triggered by profit warnings, China tariffs and political issues.
As usual, The TJX Companies, Inc. (TJX) looks like a high-odds holiday play due to its long-term sector leadership and a two-month price pattern that should support a healthy breakout. The stock topped out just above $40 in 2016 and entered a downtrend that found support in the low $30s in the second half of 2017. It returned to resistance in March 2018 and broke out nearly three months later, entering a strong uptrend that stalled in the mid-$50s in August.
Price action since that time has carved a narrow trading range with support at the 50-day exponential moving average (EMA) near $54.25. It returned to range resistance on Nov. 1 and split two-for-one a few days later, but the event hasn't triggered selling pressure, suggesting resilience that can support a rally into the lower $60s. Conversely, a decline under the split day low at $53.99 would raise a red flag, increasing the odds for a fill of the August gap between $52 and $50.
Kohl's Corporation (KSS) shares ended a multi-year uptrend in the upper $70s in 2002, establishing a resistance level that denied breakout attempts in 2007 and 2015. The stock returned to that level for the fourth time in June 2018 and has spent the past five months flip-flopping in a shallow rising channel with resistance in the mid-$80s. A breakout could generate a wave of long-term buying signals and a rally into the triple digits.
The on balance volume (OBV) accumulation-distribution indicator posted a new high in September 2018, lending support to a potential breakout, but seesaw price action between the upper $60s and low $80s looks unstable and in need of a final consolidation phase. A pullback that holds the 50-day EMA near $76 could do the trick, generating an early buying signal for a long overdue breakout.
New York and Company, Inc. (NWY), the current incarnation of the old Lerner Shops, has set up a high-risk high-reward pattern for the 2018 holiday season. The stock ended a four-year downtrend at 82 cents in 2008 but made limited progress into the new decade, topping out at $7.50 in 2013. It has traded within those boundaries for the past five years, carving a lower-highs trendline that resisted a July 2018 breakout attempt.
A decline into the 200-day EMA found willing buyers last week, generating a small-scale breakout that could presage another test at resistance prior to year end. More importantly, accumulation has lifted to an 11-year high, signaling unusual buying interest that could imply much higher prices. The company has announced a rebranding initiative that will include a Nov. 19 name change to RTW Retailwinds Inc. (NYSE: RTW). This strategy might add to buying pressure in the coming months.
The Bottom Line
All signs point to a strong 2018 holiday season, but many retail stocks look undervalued after the October correction and could play catch-up in the coming weeks.
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>