Piling into derivative contracts of Dollar Tree (DLTR), the enthusiastically positive response within the investment community seemingly bodes very well for DLTR stock. At the same time, the narrative presents a mixed bag. With the discount dollar store targeting certain segments of the consumer economy, bullishness here might not translate to optimism in other sectors.
Let’s face reality – you don’t shop at Dollar Tree to make a statement about your wealth or lot in life (unless it’s for purely ironic purposes). Further, with mass layoffs that started in earnest in 2022 accelerating into the current year, along with ongoing questions about economic stability, DLTR stock certainly commands relevance.
Unfortunately, a relevant discount retailer isn’t exactly the most encouraging data point to see at a juncture like this.
DLTR Stock Enjoys Rising Momentum
From the beginning of this year to the close of May 5, DLTR stock gained 10.84%. Conspicuously, this performance runs hotter than the benchmark S&P 500 index, which posted a return of 8.16% up during the same period. As well, in the trailing one-month period, DLTR swung higher to the tune of 4.31%. On the flipside, the S&P index gained less than 1%.
Again, outside of any other context, investors would probably be holistically enthused about the upshot in DLTR stock. Fundamentally, though, Dollar Tree – while offering something for everyone – generally focuses on households with modest incomes that could really use the savings.
Even those that shop at Dollar Tree based on their volition (as opposed to their desperation) acknowledge that the retailer provides good value; that’s always been the core message, as a recent Motley Fool op-ed implied.
Now, don’t get me wrong – good value is good value. However, if investors are anticipating a wave of customers rushing toward Dollar Tree stores with that exact agenda in mind (and nothing else), the consumer economy may be signaling pessimism.
So far, traders don’t seem that worried about the wider and negative implications of Dollar Tree’s rising demand profile. Instead, following the close of the May 5 session, DLTR stock represented a top highlight on Barchart’s screener for unusual stock options volume.
Specifically, total volume hit 56,801 contracts against an open interest reading of 151,478. Further, the delta between the Friday session volume and the trailing one-month average volume came out to 766.93%. Call volume hit 55,494 contracts while put volume only reached 1,307. This pairing yielded a put/call volume ratio of 0.02, on paper dramatically favoring the bulls.
Nevertheless, it’s an awkward setup, pitting short-term traders against long-term investors.
Dollar Tree Faces Major Questions Ahead
As Barchart contributor Rich Asplund pointed out, the stock market managed to close out last week on a high note. “A sharp rebound in regional bank stocks Friday eased concerns about the banking sector. Also, strong quarterly earnings results from Apple boosted market sentiment and gave the overall market a lift,” wrote Asplund.
On surface level, the circumstances seemingly point to a recovery from the failure of First Republic Bank (FRCB), the third financial institution to fail this year. However, the Federal Reserve has yet to comprehensively address its core mission: curb stubbornly high inflation. Adding bank failures to this already gargantuan task seems at the very least unhelpful.
Indeed, the Associated Press stated during the First Republic fallout that some “midsize banks suffered large withdrawals of deposits and were forced to borrow from federal programs to shore up their balance sheets, but none were hit as hard as First Republic.”
To be fair, circumstances appear to have stabilized, with price action in the market suggesting that very few investors, if any, were surprised by First Republic’s collapse. Still, as another AP article headlined, the banking crisis isn’t over yet.
“The bigger worry is that the bank failures might lead to doubts about relatively healthy banks, creating a financial contagion that could impact the wider economy. Averting that scenario was the reason the U.S. put tighter restrictions on major banks following the financial crisis 15 years ago,” stated the AP.
Moreover, a financial contagion can easily spark more layoffs – and layoffs for good jobs, not burgers-and-fries type of jobs – forcing more consumers to consider Dollar Tree visitations as the first resort, not the last.
While that might be bullish for DLTR stock, it’s not exactly encouraging for the rest of us.
No Need to Panic But Be Smart
Fundamentally, there’s no need to panic about pressing economic challenges. Besides, panicking wouldn’t do anybody a lick of good. However, with options sentiment – and open-market sentiment for that matter – so positive for DLTR stock, it’s time to be smart about the current situation.
Perhaps that might mean diversification in terms of your bank account holdings. Or it might mean thinking very carefully about your wealth allocation toward highly speculative, risk-on ventures. While the talking heads on mainstream media might be saying everything’s A-OK, the unusually bullish sentiment for DLTR stock would ironically beg to differ.
In other words, if purely discretionary retailers enjoyed robust support, that would be a very positive sign for the economy. However, a name like Dollar Tree outperforming presents an underlying cautionary tale.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
