Retail Earnings Could Move This Week’s Market

Retail stocks could move the market this week, with major reports from big box retailers and struggling mall anchors. The timing is horrific, with the coronavirus outbreak disrupting supply chains while American consumers pull back from discretionary buying that includes everything from smartphones to vacations. Things could get even worse when the outbreak expands, inducing Americans to stay away from gathering places that include shopping malls and Walmart Inc. (WMT) stores.

The retail sector led the market higher in the first half of the first quarter, with sector funds breaking out to all-time highs in reaction to the U.S.-China trade deal. The outbreak has ended the rally dead in its tracks because the market hates uncertainty, especially when dealing with a lethal threat to family and friends. There’s really no road map for what happens next, but we can assume that a virus-driven economic downturn will force many employers to tighten their belts.

Rising layoffs would deliver a death blow to consumer buying in 2020 and beyond, generating a vicious feedback loop that sends the United States and the rest of the world into a major recession. It isn’t outlandish to consider the possibility after the longest expansion in American history as well as an upcoming vote that could elect a candidate committed to expanding worker benefits, much higher taxes, and breaking up big corporations.

Target Corporation (TGT) reports earnings ahead of Tuesday’s opening bell. The stock broke out above four-year resistance in the mid-$80s in August 2019 after Target reported a blowout quarter. The rally stalled in the upper $120s after the November report, giving way to a small-scale topping pattern that broke to the downside in mid-January, The stock sold off through the January low last week and closed under the 200-day exponential moving average (EMA) for the first time since May 2019.

It’s still trading above the massive August breakout gap between $85 and $98, with strong support in that zone likely to yield a long-term trading floor. However, heavy distribution since December has taken a toll on the bullish technicals, which now favor a broad and choppy trading range between $100 and $120. Current shareholders could survive this holding pattern, but sidelined investors should probably look elsewhere, regardless of this week’s metrics.

Costco Wholesale Corporation (COST) reports earnings after Thursday’s closing bell. The stock lifted into sector leadership at the start of the last decade and continues to hold that lofty status in 2020. Costco shares posted an all-time high at $325.26 on Feb. 21 and turned sharply lower, dropping nearly 17% in just four sessions. The stock closed below the 200-day EMA on Friday for the first time since February 2019 but has regained that critical support level on Monday morning.

A recovery wave will run into a buzzsaw of new resistance above $307, marking a good spot to exit positions if you got caught in the downdraft and are looking to lighten exposure. Accumulation readings took a hit during the downdraft, but the long-term technical outlook remains bullish. Even so, it could be months before Costco tests or exceeds last week’s lofty high because it has broken the string of higher highs and higher lows in place since December 2018.

Kohl’s Corporation (KSS) shareholders are holding their collective breath ahead of Tuesday’s pre-market report after weak results from Dillard’s, Inc. (DDS) and Macy’s, Inc. (M) last week. Kohl’s stock topped out near $80 in 2015, sold off into the $30s in 2016, and failed a 2018 breakout attempt. Bears have controlled price action since that time, carving ugly price action that is quickly approaching the 2016 low.

The stock spent eight months trying to build a basing pattern in the mid-$40s before breaking down last week, establishing a resistance level that will be tough to mount, regardless of quarterly results. More ominously, a breakdown at the 2016 and 2017 lows in the coming weeks would open the door to an eventual test at the deep low in the mid-$20s, posted during the dark days of the 2008 economic collapse.

The Bottom Line

This week’s retail earnings are likely to highlight coronavirus headwinds that will affect price action into the second quarter.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.