Trading Low End Retail Against the Middle
One of the more fascinating stories in the world of retail is the way that mid-level retailers like Target Corporation (NYSE: TGT) and JC Penny (NYSE: JCP) have been losing out to lower end retailers, including Family Dollar (NYSE: FDO) and Fred’s (NASDAQ: FRED).
Whether Target or JC Penny will make the necessary adjustments to compete – or whether an improving economy over the next year makes the middle class appeal of Target and JC Penny all the more affordable to those consumers now crowding the aisles at the dollar stores – remains to be seen. Negative sentiment towards Target is especially strong. The company’s stock fell by nearly 3% on Thursday, gapping lower at the open and finishing lower for a sixth day in a row.
And sellers are active in JC Penny, as well. Unlike Target, JC Penny continues to trade in bull market territory. But the stock has sold off over the week, closing lower for four days in a row and pulling back by more than 2% ahead of trading on Friday.
But maybe the most interesting market move on the day was the one in Family Dollar, which reported quarterly earnings after the bell on Thursday that were in-line with expectations. FDO had been trending lower for most of the day on Thursday, and was on track to close lower for a fourth day in a row (I tweeted as much intraday!).
Traders in a buying mood saw things differently, entering the market intraday on Thursday after three consecutive lower closes and a finish in oversold territory to send the stock bounding higher ahead of Friday’s open by more than 1%.
If this late buying in FDO is indicative of broader potential buying interest in the sector, then traders may want to also consider weakness in discount retailers like Fred’s, mentioned above. Fred’s has closed lower for four days in a row, dropping by approximately 1% on Thursday. And if Target’s slip below the 200-day moving average puts the stock on your own personal “stay away” list, then consider WalMart (NYSE: WMT), the O.G. of low-end retail, which has closed lower for the past two days in a row and is nearing short-term lows.
*Note: shares of Family Dollar were lower by more than 2% in the afterhours despite the earnings beat due to disappointment on revenues.
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David Penn is Editor in Chief of TradingMarkets.com.