High-end retail shops, along with jewelers and trendy boutiques, recovered well after markets crashed in 2008, but they face tremendous challenges going forward. Although the rich have remained rich in these hard times, everyone else is feeling a lot of pain and unlikely to revert anytime soon to pre-crash buying sprees.
The well-heeled may pay their rent, but these storefronts also depend on the upwardly mobile, who have wads of discretionary cash to throw around. The bear market, however, decimated this particular tribe of consumer society. They're currently spending in denial, defying the reality of their reduced means in a sort of process of grieving that, after a period of anger, bargaining and depression, ends with acceptance.
American consumers are somewhere in between. They recognize the massive loss of wealth but deny its permanent impact on their lifestyles and buying habits. Eventually, whether it due to defaults, bankruptcies, unemployment or some social process of osmosis of the new, bleaker reality, they will shift to frugality.
This is why I believe discount shops and variety stores are positioned for healthier gains, compared to the high-end names that bounced sharply after the 2009 lows. This makes perfect sense, given the superior performance of these issues right in the middle of the crisis, when everyone expected the world economy to flame out.
A quick look at
Ninety-Nine Cent Stores
lends immediate support to my bullish outlook for discount shops. While the retail ETFs and indices are stuck in four-month trading ranges, this lesser-known issue has just broken out to a five-year high near $17. Even more impressive, the breakout coincided with a broad index pullback.
The reward-to-risk profile isn't particularly favorable for new long positions right here because the stock is testing resistance that goes back to 2004. However, a consolidation, with a quick dip down to the 50-day moving average, would fill out the pattern and set up supportive conditions for a rally into the $20s.
Familiar Dollar Stores
sold off from $35 to $14, and bottomed out in January 2009, well ahead of the world markets. It returned to the high last April and dropped into a long consolidation pattern, with support in the upper-$20s. The stock has perked up in recent weeks and is now trading at an eight-month high.
More importantly, it's filling out the handle in a multiyear cup-and-handle pattern. This process may be completed in the next month or two, setting the stage for a major breakout over resistance in the mid-$30. There's no rush here; this is a relatively slow-moving stock, but readers with a long-term horizon may have a real winner heading into the second half.
Dollar Tree Stores
posted a historic $48.25 high in 2000, then entered a long decline. It returned to this price level last May, moved sideways for three months, and broke out in late August. The uptrend stalled immediately, and gave way to an ascending triangle pattern that is still in place nearly six months later.
Resistance at $52 has been tested twice, with price pulling back from that level nearly three weeks ago. It bounced at triangle support, and is now trading back above the 50-day moving average, setting up for another assault at the high. Accumulation took a hit on the recent decline, so any breakout could evolve slowly. The company reports earnings on Wednesday morning.
Dollar General Stores
went public at $22 on Nov. 13. It nosed up to $24.77 a month later, then rolled over, breaking the low of the IPO session some two weeks ago. Buyers appeared at that level and lifted price back into the midpoint of the three-month range, where it now trades.
The stock holding its IPO price is a bullish sign, because many shareholders came into the market at that level. Resistance just below $25 is clearly delineated on this pattern, despite reduced technical data. With the stock trading at less than two points below that level, a momentum breakout could happen at any time.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
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, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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