Retail stocks have been crushing the market against all odds — and traders are betting on more gains

Crowded shopping storeSean Gallup/Getty Images

  • Retail stocks have been outperforming the broader
    market over the past month.
  • Even after these market-beating returns, the options
    market shows that traders are getting more bullish on the
    sector going forward.

For months, market experts have been sounding the alarm on the
retail apocalypse. As Amazon
wields its mighty influence over multiple industries, it’s been
all but assumed that many traditional retailers will lose a huge
chunk of value, if they survive at all.

But against all odds, retail stocks have been mounting a silent
comeback in the stock market over the past month. Foot Locker,
Macy’s, and Gap are the three biggest gainers in the S&P 500 during the period,
surging more than 28%.

Meanwhile, on a sector basis, three of the top six
best-performing industries in the last month are in the retail
space, out of 24 groups. They’ve each climbed more than 5.9%
during the stretch, smashing the benchmark S&P 500’s gain of
just 1.5%.

And, in a development that’s perhaps the most telling of all,
traders are getting more confident about further increases. Their
piqued interest can be seen in a measure of outstanding options
on an exchange-traded fund tracking
the retail sector. Open interest on the SPDR S&P Retail ETF has
risen to more than 530,000 contracts, the most since January
2014, according to data compiled by Bloomberg.

retail etf open interestBusiness
Insider / Andy Kiersz, data from Bloomberg

In a sign that those traders are using those additional contracts
to get express more confidence in retail, the ratio of bullish
options to bearish ones has climbed sharply. Further, a measure
of investor positioning known as skew shows that investors have
been paying less for downside protection.

So why the sudden change of heart for investors? For one, it’s
possible that they’ve been encouraged by recent turnaround
efforts by traditional retailers. Perhaps the most resilient
company has been Walmart, which smashed analyst expectations
during the third quarter after growing its online business.

It’s also within the realm of possibility that traders think
retail stocks simply got oversold. After all, Macy’s and Foot
Locker — two of the success stories mentioned above — were down
more than 50% year-to-date before their recent rallies.

Regardless of the true reason, it’s clear that retail is enjoying
a rare patch of strength. And while the long-term future of the
industry is still very much up in the air, it’s an encouraging
sign that traders are betting on continued resilience.



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