Dow component Walmart Inc. (WMT) rose just 5.4% in the second quarter, far less than the S&P 500 index's impressive 20% gain, making the retail giant a notable laggard. That's quite a turnaround after a month-long momentum-fueled advance ended at an all-time high above $133 on April 20. Intense distribution has marked the retreat since that time, underpinned by speculators exiting first quarter COVID-19 trading vehicles.
However, bullish fundamentals haven't changed as we enter the second half of 2020. Dozens of brick-and-mortar retail chains are likely to go bankrupt or be taken over by suitors in the next 18 months because depressed revenues, as a result of pandemic, won't be enough to pay the bills. In addition, the out-of-control epidemic in the Southern and Southwestern states may spread to the rest of the country in a second wave, forcing shoppers to avoid malls for many more months.
Walmart and e-commerce rival Amazon.com, Inc. (AMZN) should pick up sizable market share as a result of those retail closings, boosting earnings in 2021 and beyond. Of course, Walmart is also a top-tier e-commerce provider, running a website built to compete directly with Jeff Bezos' brain child. The rapid growth in Walmart's online operation has just allowed the company to "wind down" Jet.com, the $3.3 billion acquisition used to jump start its online sales in 2016.
Walmart stock has sold off over 10% since topping out in April, but the shareholder exodus has been more severe, dropping accumulation-distribution indicators to 52-week lows. However, it has been sitting on deep support at the 200-day exponential moving average (EMA) for the past three weeks while relative strength cycles start to cross over, raising the odds that bulls will resume control of the ticker tape. This bodes well for new highs in coming months.
Walmart Long-Term Chart (1996 – 2020)
A persistent correction ended at a five-year low in 1996, giving way to an uptrend that reached a new high one year later. Momentum traders then jumped in, carving a powerful advance that topped out at $70.25 on the last trading day of the 20th century. That marked the highest high for the next 12 years, ahead of a downtick that found support in the low $40s in March 2000. Subsequent declines tested that level successfully four times into 2003, but the trading floor failed to stir buying interest, yielding additional tests in 2005, 2006, and 2007.
The stock held up well through the 2008 economic collapse, setting the stage for an uptick that finally closed the distance into the 1999 high in the fourth quarter of 2013. A 2015 breakout added about 15 points before turning tail with the broad retail sector, which was losing market share to e-commerce at a rapid pace. It fell to a four-year low in November, underpinning Walmart's decision to proceed with the Jet acquisition a few months later.
Walmart Short-Term Outlook
A 2017 breakout marked the start of a new era, yielding a two-legged uptrend that continued into April 2020's all-time high. Sellers then took control, dumping the stock onto long-term moving average support near $117 in mid-June. This level could act as a springboard in coming weeks, lifting Walmart back to the second quarter high. However, it will need to rebuild lost sponsorship between now and then, perhaps in response to renewed shutdowns and quarantines.
The monthly stochastic oscillator illustrates the stock's first quarter turnaround, crossing into a sell cycle in December 2019 and flipping into a buy cycle just three months later. It's now traversing the panel's midpoint, in a perfect position to attract renewed buying interest. In addition, the weekly oscillator has just crossed higher from the oversold level, raising the odds that sidelined investors are getting ready to jump on board.
The Bottom Line
Walmart may have ended an intermediate correction, setting the stage for strong third quarter upside.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.