Retail Stocks Could Sell Off in Coming Weeks

November retail sales reported on Wednesday fell 1.1%, while October sales were revised from 0.3% to -0.1%. Slumping auto sales were a big contributor to the downside, with a slightly positive 0.1% when auto sales are removed from the calculation. Even so, the dismal results confirm earlier data suggesting that this year's Black Friday and Cyber Monday events were duds. Given their importance, 2020 holiday sales could underperform euphoric estimates by a country mile.

The second pandemic wave is taking a heavy toll on consumer sentiment and buying power, with layoffs surging once again due to shutdowns and capacity restrictions. Unfortunately, the retail sector is priced for perfection at the moment, raising doubts about the sustainability of current prices. Retail mega-stores might weather this storm, given their enormous footprint, but brick-and-mortar storefronts and small e-commerce operations could lose ground into 2021.

It's instructive to note that Amazon stock hasn't posted a new high in more than three months, despite the fourth quarter rally. In addition, Dow component Walmart Inc. (WMT) has been ticking lower for a month after hitting an all-time high, showing few signs of buying interest. This distribution has tracked the slow rotation out of COVID-19 beneficiaries and could now expand, with the holiday season waving a red flag.

The SPDR S&P Retail ETF (XRT) is showing no signs of weakness despite growing headwinds, hitting an all-time high at $63.57 on Thursday. However, this is December triple witching expiration week, when the strongest trends of the year often reach their peak. It makes sense to watch the fund closely between now and year end because institutional managers often lock in annual profits into Friday's expiration event and head out for the holidays.

This is especially true because 9 of the top 10 performing fund components have major brick-and-mortar exposure, making them more heavily dependent on physical sales. This group could take the biggest hit to fourth quarter sales, with customers preferring to stay out of closed ventilation systems. Shopping malls are at most risk, raising doubts about the positioning of Nordstrom, Inc. (JWN) and Kohl's Corporation (KSS) in the second and third slots in component strength.

Amazon shares posted an extraordinary 89% year-to-date return into the Sept. 9 all-time high at $3,552 and entered a trading range that has drawn the outline of a symmetrical triangle pattern. Volatility has fallen off a cliff since the second week of November, with price action loosely confined between $3,080 and $3,250. In addition, the stock has traded below the 60-day moving average of volume in every session since Nov. 10.

This is a bullish consolidation pattern in most instances, and there are few signs of distribution, but the weak action has forced the monthly stochastic oscillator to cross into a sell cycle that predicts relative weakness well into the first quarter of 2021. It's no coincidence the two triangle lines will converge in March 2021, with both elements predicting that the stock has hit its high for 2020 and could shake out complacent bulls during January tax-selling season.

The Bottom Line

Worse-than-expected October and November retail sales are flashing a warning signal for the sector, raising the odds that the uptrend is coming to an end.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.