Major retailers report third quarter earnings this week, setting the stage for a holiday season that is likely to surpass already optimistic estimates. Beaten-down shares of brick-and-mortar storefronts could bounce off deep lows and post the strongest returns during this period, but long-term investors should remain narrowly focused on a handful of sector leaders that have emerged as 2019 momentum plays.

Consumer spending and the employment market remain solid-as-a-rock despite the trade war and growing calls for an economic slowdown, translating into steady but sluggish growth in retail sales and revolving credit. There's little reason to expect this trend to reverse until the nation's employers increase layoffs and drop monthly Non-Farm Payrolls (NFP) data into a string of weak or negative numbers.

Mall anchors and their occupants have taken the brunt of 2019 selling pressure, while strong evidence suggests that big box retailers are picking up the slack. E-commerce continues to grow market share as well, predicting a long, slow slide into oblivion for many well-known retail names. However, the group is now technically oversold, just in time for the barrage of Black Friday advertising that marks the start of the holiday season.

Tariffs scheduled to come online in December mark a wild card in this equation, but China and the United States appear intent on completing the first phase of a trade deal prior to their implementation. Even if those fees hit store shelves prior to Christmas, there may be little impact to 2019 sales because retailers are likely to cut holiday profit margins to stay competitive, as they've done in the fourth quarter for many years now. 

The Home Depot, Inc. (HD)

Chart showing the share price performance of The Home Depot, Inc. (HD)
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Dow component The Home Depot, Inc. (HD) reports in Tuesday's pre-market, with analysts expecting profits of $2.53 per share on $27.5 billion in revenues. A multi-year uptrend topped out at $208 in January 2018, giving way to a two-sided tape and a September breakout that failed a few weeks later. The stock fell to a 15-month low in December and turned higher into 2019, carving an impressive recovery that reached a new high in September.

The rally has added another 10% since that time, posting an all-time high at $239 about four weeks ago. The stock has been consolidating at short-term support since that time, with a bullish report likely to generate a rapid advance to new highs. More importantly, this year's breakout has generated a measured move target well above $300, telling sidelined investors that it still isn't too late to get on board.

Target Corporation (TGT)

Chart showing the share price performance of Target Corporation (TGT)
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Target Corporation (TGT) reports in Wednesday's pre-market, with analysts expecting profits of $1.18 per share on $18.45 billion in revenues. A multi-year uptrend ended in the mid-$80s in 2015, giving way to a long period of underperformance, highlighted by a well-publicized hacking incident that affected millions of customers. The downturn finally bottomed out at a five-year low in the upper $40s in 2017, yielding an uptick that stalled at the prior high in the third quarter of 2018.

The subsequent decline found support at the .618 Fibonacci sell-off retracement level in December, generating a strong bounce and powerful breakout to new highs following second quarter earnings in August. The stock has added another 10 points into November, settling around $111 ahead of this week's confessional. Another strong quarter makes perfect sense, with generally benign economic conditions still in force.

Macy's, Inc. (M)

Chart showing the share price performance of Macy's, Inc. (M)
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Macy's, Inc. (M) pre-market report on Thursday completes the trifecta, with analysts expecting profits of just $0.03 per share on $5.31 billion in revenues. A four-year recovery wave completed a round trip into the 2007 high in the mid-$40s in 2013, ahead of a 2014 rally that posted an all-time high at $73.61 in July 2015, Aggressive sellers then took control, generating a failed breakout, followed by a steep downtrend that found support in the upper teens in 2017.

The subsequent bounce failed in June 2018, giving way to renewed downside that reached a 10-year low after second quarter earnings in August. The stock has been testing new support in the mid-teens for the past three months while the monthly stochastics oscillator is turning higher at the oversold level. This is a classic reversal pattern, raising odds for a "better-than-feared" bounce after this week's release.

The Bottom Line

Major retailers will report third quarter earnings this week, setting the tone for the 2019 holiday season.

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