Walmart went from up 20% this year to down about 7%.
Costco was up 30% on the year, and now it’s up about 6%. Nike just traded at its lowest price in more than a decade, and McDonald’s is sitting in bear market territory.
Nobody’s talking about it, but the retailers are getting systematically dismantled. And I think Target is next in line.
Why Stocks Rallied On A 29,000-Job Dud
Friday’s jobs report was a dud. The economy added just 29,000 jobs in September, and unemployment rose to 4.2%.
Wall Street was looking for around 90,000. The analysts who look at jobs reports couldn’t hit the broad side of a barn.
The S&Ps rallied anyway, because crappy jobs mean maybe the Fed doesn’t have to hike again. But look at where the rally came from. Nvidia was up almost 3%, and the semiconductors carried the whole thing, while just about every other sector faded as the day went on.
So don’t overread the bounce. It took the S&Ps right back to unchanged on the week. Underneath, the same names are still getting hit, and the retailers are near the top of that list.
The 55% Winner I’m Betting Against
Target is the outlier. It’s up about 55% this year, while Walmart, Costco and the rest of the group get taken apart one by one.
I don’t think that lasts, so I’m betting on a slide. I’m buying an out-of-the-money put spread on Target about 77 days out, around the 30 delta, $10 wide, for a debit of about $2.77.
If you’ve never traded one, a put spread means buying one put and selling a cheaper put at a lower strike against it. It caps what you can make, but it also caps what you can lose.
My risk is the $2.77 I paid, or $277 per spread. A $10-wide spread can be worth up to $10, so the most I can make is about $7.23, or $723 per spread, roughly 2.6 times what I’m risking.
For good profitability, Target has to get down to around $140. Is that plausible in the next 77 days? Sure.
When you buy out-of-the-money spreads, you’re swinging for home runs, and there’s a lot of striking out when you swing for home runs. So trade small and keep it under control.
Why I Just Bought Nike At A Decade Low
On the same morning, I started nibbling on the retailers that have already been beaten up.
I bought 200 shares of Nike in my IRA, and I’m looking at McDonald’s next. I fully expect to hold that Nike position for a long time.
So I’m betting against the one retailer that’s still flying, while slowly buying the ones that have already been crushed.
Get My Target Trade And The Rest Of My Book
The Target spread went to my Three Trades a Week members first. Right now, I’ve got Coke on the dance floor, close to 100%, Merck is in decent shape, and I’m shopping a new in-out spread.
Every week, you get my trades, the thought process behind each one and exactly how I’m managing them.
To your success,
Don Kaufman
