Not small change

04/14/20
  • Dollar General (DG) up more than 24% in past 12 days
  • Stock has consolidated in recent days—while hitting new records
  • Breakout-within-breakout scenario?

The fact that Dollar General (DG) bucked yesterday’s market downturn may not seem like that big of a deal—after all, more than 30 S&P 500 (SPX) stocks were up when the index was down nearly 2% around midday—but what the discount retailer has accomplished over the past couple of months has been no small feat.

Since January 23, DG is up around 10%, compared to an -18% loss for the SPX:

Chart 1: Dollar General (DG) and S&P 500 (SPX), 1/23/20–4/13/20 (60-min.). Dollar General (DG)and S&P 500 comparison chart. Outperformance during coronavirus crisis.

Source: Power E*TRADE


When the coronavirus grabbed the market by the throat, DG sold off less than the SPX on the way down—only -24.8% vs. -35.3% for the index—and it hit its low just four days after making a new all-time high of $167.44 on March 10. It’s also rallied more than 35% since bottoming—around 10% more than the SPX’s 25% rebound of its low.

Why the apparent resilience? Discount retailers often get bid up during times of economic stress—demand for budget goods is expected to rise when times are tight—and DG has been cited recently for its potential attractiveness during the coronavirus crisis.1

But Dollar General had been doing pretty well before the pandemic took over the markets, too. Despite being in a trading range in the last portion of 2019, DG gained more than 44% last year. And in the wake of beating its most recent earnings numbers on March 12,2 Citigroup initiated coverage of the stock with a buy rating and a $190 price target, noting the company had “a consistent model through good times and bad.”3

For traders, the question is whether such sentiment translates into further near-term gains. The following chart shows DG had entered a short-term consolidation even while knocking out new all-time highs in four of the past five days:

Chart 2: Dollar General (DG), 2/18/20–4/13/20. Dollar General (DG) price chart. Breakout watch: Paused near record highs.

Source (data): Power E*TRADE


A technical setup some chart traders look for is a market that consolidates just above or below an important support or resistance level (for example, a breakout to seven-month high). The short-term consolidation is seen as an opportunity to hop on board what may potentially be a “double-momentum” move—essentially, a smaller-scale breakout that confirms the original, larger breakout.

These are exceptional times, though, so even traders inclined toward such an outlook would proceed with the understanding that the stock may have to fight the near-term tide of a broad market that has cranked out one of its biggest three-week rallies of all time, and which started a new week by pulling back after having erased 50% of the February–March coronavirus sell-off.

In other words, even if the stock maintains its bullish bias, these traders wouldn’t be surprised to see a “head-fake” move to the downside first.

Earnings season is here: JPMorgan Chase (JPM), Wells Fargo (WFC), Johnson & Johnson (JNJ), and Fastenal (FAST), are scheduled to release their numbers today.

 

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1 Barron’s. 12 Stocks That Are Beating the Market During the Coronavirus Crisis—and Can Keep on Growing After. 4/13/20.

2 StreetInsider.com. Dollar General (DG) Tops Q4 EPS by 9c, Offers Guidance. 3/12/20.

3 TheStreet.com. Dollar General Initiated Buy at Citigroup. 4/1/20.

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