Retail Stock Offers Investors Major Upside Potential

Last week, both of our benchmark indexes finished the week green, continuing to trend upwards since their correction lows in October 2022. This outperformance has led to both indexes being in a bullish posture after forming golden crosses where the 50-day moving average has crossed up through the 200-day moving average.

Having said that, while short-term momentum remains bullish, the next major hurdle for the S&P 500 will be getting back above the 20-month moving average for two consecutive closes, increasing the probability of this cyclical bear market being over.

(Source: TC2000.com)

It was a relatively quiet week in terms of news, however, there were some events of note. One of the highlights, banks delivered earnings that came in better-than-expected as JPMorgan (JPM), Wells Fargo (WFC), and Citigroup (C) all beat analyst estimates. This added to what’s already been a solid start to earnings season for Retail names, with Lululemon (LULU) delivering a massive beat on the back of strong holiday sales, and Olive Garden and Longhorn Steakhouse owner Darden (DRI) also reporting same-store sales figures above expectations.

Overall, these reports have confirmed a trend that began in Q4, expectations being too low and results being better than most would have expected. This helped to fuel a steady uptrend in the market as there was too much pessimism about the market overall. 

On the technical front and as discussed in past updates, we saw a very rare breadth thrust on January 12th that occurs when the advancers/decliners ratio (summed 10-day average of NYSE advancers/decliners) goes above 1.98, which takes extreme buying pressure to occur. 

The highlights from this indicator, a strong track record with positive returns 88% of the time over the next 12 months, a 16% average 12-month forward return, and no undercuts of a previous major low (3500 in this case) over the next 6 months.

Combine this with what looks to be a slightly more dovish Fed (only one rate hike expected for the remainder of the year), better-than-anticipated results from many S&P 500 companies, and some opportunistic M&A and it emboldens the view that dips are likely to continue to be bought up. Historical returns and drawdowns following past breadth thrust signals are shown below:

(Source: Market Data, Author’s Table)

Valuation & Sentiment

Valuation and sentiment standpoint are two key pieces to this market puzzle, and while valuations are less useful than sentiment for timing the market, they can provide clues about how much gas the market might have left in its tank or where it is in the current cycle.

(Source: Multpl.com, Author’s Chart)

(Source: Daily Sentiment Index Data, Author’s Chart)

(Source: NAAIM Exposure Data, Author’s Chart)

Now What?

Heading into the week, the S&P 500 remains above the midpoint of its strong support/resistance range (3500 vs. 4315) at 4140. It is back above the midpoint of its range using short-term support at 3765 – 4315 resistance, which may result in a less favorable reward/risk setups for the market short term. That said, there’s no major resistance for the market until the 4190-4300 region, so this rally could extend a bit further.

Given that the market is not in a buyable position in the upper portion of its range, I am not in any rush to add new exposure to index ETFs. However, there are always opportunities out there if one is willing to dig through the rubble. Despite my caution, I remain over 70% invested as I would not be surprised to see the S&P 500 head north of 4400 in the next nine months.

In this week’s update, we’ll look at a name that hasn’t participated in the recent rally, but could be due to outperform after lagging its peers in Q1 and again in Q2. Let’s take a closer look below:

However…

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