Back on March 29th I laid out (again) my bearish case for U.S. Retailers (Consumer Doomer) highlight the underperformance of the retail sector (measured by the XRT etf), but also considering recent data and the brewing trade dispute with China:
Despite the strong University of Michigan Consumer Confidence reading on March 15th, “a measure of buying conditions for long-lasting goods fell to the lowest since 2015, suggesting consumers are reluctant to tap their rising incomes to make big purchases”. This is interesting because this can be a precursor to broader consumer weakness when consumers balk at making large purchases. US Autos sales are expected to decline by 2.5% in Q1 while Pending home sales dropped last month for the tenth time in the last twelve months, despite a sharp drop in mortgage rates this year.
Oh, and Crude oil is trading today above $60 (if it closed here it will be the highest since November) and possibly breaking out which higher oil prices might put pressure on consumers and raise input costs for manufacturers
Markets have been sensitive to news regarding the trade impasse with China and the potential for more tariffs. Make no mistake, the $200 billion in tariffs trump has levied on Chinese imports is a tax on our consumer. Without some sort of resolution soon, this will continue to cut into purchasing power. That said any deal that merely curbs further tariffs or reduces existing is unlikely to turn consumer behavior on a dime. My sense is that the risk is the downside for retail stock before we get a trade deal.
I detailed this view and the trade idea below on CNBC’s Options Action that day:
To express this bearish view I also highlighted the poor technical set up in the XRT and the relatively low levels of options prices in the etf and detailed a defined risk put spread when the XRT was $45:
XRT ($45) BUY MAY 45 / 40 PUT SPREAD FOR $1
-Buy to open 1 May 45 put for 1.15
-Sell to open 1 May 40 put at 15 cents
Break-even on May expiration:
Profits of up to 4 between 44 and 40 with a max gain of 4 below 40
Losses of up to 1 between 44 and 45 with a max loss of 1 above 45
With just two trading days to May expiration, and before Walmart’s (WMT) earnings tomorrow morning, this trade should at least be considered to be managed…
With the etf at $42.90 the May 45 put can be sold to close at $2.10 and the May 40 put can be bought to cover for 1 penny yielding a $1.09 profit from the original $1 purchase price of the put spread.
If you were of the mindset that a beat and raise by WMT could spark a retail stock rally then it would make sense to close this position. But if you were of the mindset that any strength in Walmart might be sold like Macy’s (M) today (was trading up 7% in pre-market and was down by 10am) then you might consider giving this trade another day eyeing a premium stop.
Either way, this is a bearish view that I want to continue to roll.