Retail and resistance

05/01/20
  • LULU pulled back yesterday after hitting chart resistance
  • Stock rallied nearly 70% off its March lows
  • Latest data shows sharp contraction in consumer spending

While long-term investors are usually (and correctly) encouraged to tune out short-term market “noise,” traders sometimes have to be wary of the opposite trap—letting opinions about the big picture influence decisions about near-term price action.

Take the case of athletic apparel retailer Lululemon (LULU), which has been one of the standouts in a retail sector that has faced its share of challenges in recent years. When many other retailers were fighting for relevancy and seeing their share prices drift or slump, LULU was a yoga-panted bull, stampeding from below $100 in May 2018 to $266 a little more than two months ago.

Of course, that all changed shortly after the stock hit that record high on February 20. But after tumbling to $128.84 last month, LULU appeared to revert to form, rallying 69% to Wednesday’s high of $237.49—more than three times as much as the S&P 500 (SPX) gained during the same period:

Chart 1: Lululemon (LULU), 12/2/20–4/30/20. Lululemon (LULU) price chart. LULU buying spree.

Source: Power E*TRADE


On March 26, a few days into the current rebound, LULU released its quarterly numbers, which beat revenue estimates but missed on earnings, breaking the company’s 11-quarter streak of topping both headline metrics.1 And after a one-week pullback, the stock charged back to this week’s highs—a rally that, as of yesterday, just happened to stall at a price zone (roughly $232–$236) that has alternately acted as support or resistance three times since December.

That March earnings miss was hardly a shock. LULU, like most other companies, pulled its forward guidance because of the uncertainties surrounding the pandemic, and some analysts expect the company’s next quarterly release (in June) to show a nearly 60% year-over-year earnings decline.2 (Thursday’s pullback, interestingly, dropped LULU shares fairly close to the current average analyst 12-month target price of $225.76; individual targets range from $161–$261.3)

In short, retailers across the board are facing near-term headwinds. Yesterday ushered in the predictable news that US consumer spending shrank dramatically last month, a record -7.5%, in fact.4  

Even the strongest stocks retreat from time to time, and their pullbacks can offer trading opportunities not just for nimble short-sellers but for bulls looking to enter at more favorable price levels. Another aspect of LULU’s story yesterday was that its implied volatility (IV) was relatively low, something that often translates into lower options prices. The following chart shows LULU options for the next several expirations all had IV below their 30-day averages, with the exception of the June 12 options that expire around LULU’s next earnings release:

Chart 2: LULU options implied volatility. Lower-than-average IV.

Source (data): Power E*TRADE


For stock or options traders, the question isn’t where LULU shares will be trading a year or two from now. It’s whether the price action suggests the stock’s recent rally has reached a potential short-term inflection point.

Market Mover Update: Despite a mild pullback yesterday, the US stock market just wrapped up its best month in more than 30 years: The S&P 500’s (SPX) 12.7% rally in April was its biggest one-month return since January 1987.

June WTI crude oil futures (CLM0) added to Wednesday’s 16% rally with a 26% surge yesterday that pushed the market above $19/barrel.

Today’s numbers (all times ET): PMI Manufacturing Index (9:45 a.m.), ISM Manufacturing Index (10 a.m.), Construction Spending (10 a.m.), Baker-Hughes Rig Count (1 p.m.).

Today’s earnings include: Phillips 66 (PSX), AbbVie (ABBV), Exxon Mobil (XOM), Colgate-Palmolive (CL), Chevron (CVX).

 

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1 StreetInsider.com. Lululemon Athletica Inc. (LULU) Earnings. 4/30/20.

2 Zacks Equity Research. Lululemon (LULU) Dips More Than Broader Markets: What You Should Know. 4/28/20.

3 TipRanks. Lululemon Athletica Price Target & Analyst Ratings. 4/30/20.

4 The New York Times. US Consumer Spending Plunges Record 7.5%, Reflecting Virus. 4/30/20.

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