Highest inflation in decades, inverted yield curves and recession fears. Not exactly a favorable environment for retail stocks. Or is it? It could be favorable for Dollar Tree and other members of the discount retail group. We've already had one swing trading success with Dollar Tree stock and it may be setting up for another.
Rumble In Retail
Retail took some big hits in the last earnings season. The worst came when Target fell far short of its earnings estimates and dragged the rest of retail down with it (1). Target stock fell nearly 25% that day and knocked Dollar Tree stock down 14%. Target blamed high supply-chain and labor costs for the miss and the assumption was that Dollar Tree faced similar constraints and Dollar Tree stock could fall.
But when Dollar Tree reported earnings (2), it painted a different picture and Dollar Tree stock rose. Same store sales rose 4.4% for the quarter ending in April and the company guided higher for its full-year sales and earnings estimates. Rising costs for fuel and goods pushed consumers to the discount chains for their needs.
Dollar Tree stock rose nearly 22% on the news and was right back above its 50-day moving average line before Target dragged it down.
From there Dollar Tree stock drifted lower over the next several weeks.
Recession Fears Boost Dollar Tree Stock
On July 5, Dollar Tree stock joined SwingTrader after it broke above its downtrend and popped back above its 50-day moving average line (3). Volume spiked above recent activity and the relative strength line was back at new highs.
As recession fears grew, the prospects for Dollar Tree also grew. The assumption is that between inflation and recession fears, consumers would have more reasons to gravitate to Dollar Tree stores.
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One could argue that Dollar Tree stock earned a longer holding period. But for swing trading we focus on the short-term moves and even more so in the current tough market environment.
For that reason, we took our first profit by taking a third off the position the next day with a 3.5% gain (4). We nearly took our second third profit the following day (5). We had a 6% gain from our entry but didn't hit our slightly higher target of 7%.
An Exit And Repurchase
We didn't want to overstay our welcome and eventually exited Dollar Tree stock on weakness.
The inside day after its near-term top wasn't concerning (6). However, the fall below its 5-day line started to muddy the picture (7). We've been using the shorter moving average to make sure we keep losses small and retain as much profit as possible. On the positive side, volume wasn't heavy and it wasn't a decisive close below the 5-day line. So we held.
We gave Dollar Tree stock room to recover the next day but the stock, and general market indexes, fell sharply late in the session (8). We made our final exit to protect our profit. Overall, DLTR wasn't showing extreme negative action. But we've been tightening our stops and not giving stocks much room below their 5-day lines.
As inflation data came in hot and recession fears grew, Dollar Tree stock found support at its 10-day line. Normally, we'd like to see more of a pullback before considering an entry. But with our previous success, we decided to reenter the trade (9). Volume and the relative strength line again showed confirming strength.
Our entry was slightly higher than our exit but the reversal gives us a clear line in the sand to keep our risk small.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
