Should retailers be trading at the highs?

Updated: Sep 19, 2020

Viral particles scaring people and crashing the stock market

First came Amazon. Now COVID-19 is laying waste to brick and mortar retailers. The first domino fell with the announcement that Neiman Marcus has filed for bankruptcy. With consumer spending & confidence seeing meaningful drops of late, many more are likely to come. Recent pieces have highlighted the companies that have the highest probabilities of bankruptcy within the next 12 Months - these include perennial favorites like JC Penny that is rumoured to plan a bankruptcy.

Meanwhile, the S&P Retail Select index has retraced a large part of the drop. That’s right. As the US Unemployment rate hits the highest level since the Great Depression, retail stocks are headed back to the highs.

S&P Retail Industry price chart

TOGGLE analysis is much more pessimistic on the sector. Since the beginning of February, the system uncovered a number of potential bearish drivers across the retail names, steadily building the case for a move down.

Many of the stocks are currently showing negative momentum as well as downward analyst revisions. As economic conditions started to shift in March, expectations began dropping. April is when the tide really started to turn.

What’s quite compelling about these findings is that they contain a mix of fundamental and price-driven pressures indicating retail stocks could give back their gains. This dramatically increases the scope of available data points TOGGLE was able to use in back-testing each pattern, and wasn’t limited only to previous downturns in the business cycle.

As we contemplate the fallout from a lengthier lockdown, are these really the stores shoppers are going to come back to? Market judgement is currently betting “yes.” But the risk-reward is surely not compelling.