There has been no shortage of cross-currents of late regarding the U.S. consumer, the one thing that most economist can agree on is the thing holding up the global economy. While there have been some disappointing reads on consumer confidence, housing numbers have been pretty solid, and have seen a recent uptick while consumer loan growth is expanding and household income growth has stalled.
To state the obvious, the U.S. consumer will be the last battle fought prior to the next economic downturn, and I suspect if history is any guide they will put up one heck of a fight. While U.S. retail appears to be in flux, as we are uniquely over-stored vs every other nation in the developed world, we are seeing a bit of a bifurcation between retailers that are keeping pace with Amazon’s (AMZN) disruptive force, and they all appear to be lumped in the big box space, Walmart (WMT), Target (TGT), Costco (COST) and The Home Depot (HD). All of these stocks trade at or very near their all-time highs, dramatically outperforming the S&P 500 (SPX) up 20% and the XRT, the etf that tracks the retail space, which is only up about 4% ytd. These 4 stocks all have something else in common, they all had massive technical breakouts above prior highs, establishing a new trading range that they have yet to even test:
WMT up 27% ytd
TGT up 61% YTD
COST up 41% ytd
HD up 34% YTD
I guess from a fundamental standpoint one could make the point that while the U.S. consumer is still chugging along they are looking for value, and they are finding it at big-box retailers. Which brings to another name that could have similar characteristics than let’s say a TGT in a sort of trade-down consumer environment, and that is TJX Cos (TJX). Their off-price apparel and home goods model makes them somewhat insulated from some of the pressure from online apparel retailers, and interestingly, the chart since the start of 2018 looks very similar to that of the names above prior to their breakouts. To my eye, the stock has healthy technical resistance around $57 and decent support near $50:
The next identifiable catalyst for shares of TJX will be their Q3 results on Nov 19th. I suspect just like the 4 stocks above it will take a beat and raise to get the stock to breakout above prior resistance and establish a new trading level above the prior highs.
So what’s the trade? If you were inclined to play for a new high after Q3 results, then it might make sense to consider a call calendar, selling an out of the money call prior to the earnings event and using the proceeds to help finance the purchase of the same strike call in a later expiration that will capture earnings, for instance…
Bullish Trade idea: TJX ($55) Buy Nov /Jan 57.50 call calendar for $1
-Sell to open 1 Nov 57.50 call at 80 cents
-Buy to open 1 Jan 57.50 call for $1.80
Break-even on Nov expiration:
This trade performs best with a gradual move towards the 57.50 strike over the 7 weeks into Nov expiration. If the stock is below 57.50 on Nov expiration the short 57.50 call will expire worthless and the trade will be left naked long the Jan 5750 call. If the stock is close to 57.50 then the Jan 57.50 call should have appreciated as it will have picked up deltas. At that point it might make sense to further reduce the premium at risk by selling a higher strike call in Jan turning the trade into a vertical call spread. The max risk f this trade is the $1 premium paid (or less than 2% of the stock price), and would be at risk with a large move below the current level, or well above the 57.50 strike.