Retail stocks have rallied off their December lows
The retail sector rallied hard off its December lows, as evidenced by a 15% rally in the SPDR S&P Retail ETF (XRT) from its Dec. 24 bottom. However, the rally over the past several weeks has a number of retail stocks trading near trendlines that have preceded a leg lower on the charts, including department store name Kohl's Corporation (NYSE:KSS) and shoemaker Skechers USA Inc (NYSE:SKX). This suggests it could potentially be time to sell the stocks or initiate a bearish options trade.
Short-Term Kohl's Options are Cheap Right Now
After hitting a seven-month low of $58.93 on Dec. 24, Kohl's rallied all the way up to $70.87 by Jan. 9 -- and right into its 200-day moving average. The retail shares retreated quickly from here, but are once again testing resistance at this trendline, as well as their 80-day moving average -- last seen down 1% at $68.90 -- and history suggests more downside could be on the horizon.
Per Schaeffer's Senior Quantitative Analyst Rocky White, the three previous times Kohl's has come within one standard deviation of its 200-day moving average after trading below it 60% of the time over the last two months and in eight of the last 10 trading days, the stock averaged a one-month loss of 5.4%, with not one of the returns positive. Similar run-ups to its 80-day trendline in the last three years have resulted in an average one-month loss of 4.8%.
A round of bearish brokerage notes could turn up the heat on Kohl's stock, too. While seven of 17 analysts maintain a "strong buy" rating on the retailer, the average 12-month price target of $73.78 sits in territory not seen since mid-November.
Those wanting to bet on a repeat of history may want to consider a premium-buying strategy. KSS stock's Schaeffer's Volatility Index (SVS) of 33% ranks in the 15th percentile of its annual range, meaning short-term options are pricing in relatively low volatility expectations at the moment.
Skechers Sounds Bearish Technical Signal Before Earnings
Skechers stock skimmed $21.45 on Dec. 24, marking its lowest intraday trading level since November 2016. Since then, the security has gained 25% to trade at $26.81. But the shares are now testing resistance at their 160-day moving average. Following the nine prior times SKX has rallied up to this trendline after a lengthy stretch above it, the stock's been 6.8% lower, on average, one month out, according to White's data.
Looking closer at the charts, it's been a relatively quiet stretch for SKX shares, per their 120-day historical volatility of 42.9%, which registers in the 4th annual percentile. This could change next week, with the company tentatively slated to report fourth-quarter earnings after the close next Wednesday, Feb. 6. The shares have averaged a post-earnings move of 16.7% over the last two years -- including back-to-back single-day drops of more than 20% in April and July.
With earnings expected next week, though, near-term options premiums are relatively rich at the moment, per SKX's 30-day at-the-money implied volatility of 65% -- in the 91st annual percentile. As such, those wanting to bet on the stock's short-term trajectory may want to consider a premium-selling strategy or a long put spread, the latter of which lowers the cost of a bought put with a sold one.