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Are retail stocks a bargain?

Photo of Nick Radge By Nick Radge

min read

What the share-price charts say about Premier, JB Hi-Fi, Super Retail Group and Myer.

The mid-cap retail sector currently offers tales of happiness and joy, with some woe and distress thrown in. Let’s assess the top-down view of the Consumer Discretionary Sector from a technical standpoint.

I’m not normally a big user of sector analysis on ASX for assessing individual stocks simply because the weighting of certain stocks in some sectors can have a huge influence and distort the outlook for others.

The Consumer Discretionary Sector shows a recovery off the Global Financial Crisis lows that has been commendable, although technically it has not been a bullish movement; the pattern progression points to a longer-term grind rather than the start of a larger trend higher.

The recovery has been restricted to 50 per cent of the prior losses – a slow grind. This is typical price action of a bearish bounce rather than a sustainable upward trend. This, coupled with waning momentum over the past few years, suggests we would now expect weakness over the course of 2016 and 2017, with potential downside targets circa 1400 to 1500, or about 23 per cent lower.

The chart below does offer a moderate area of support at 1680 which, if penetrated, would certainly confirm our expectations. The sector analysis portends caution.

Source: Premium Data

(Editor’s note: Do not read the following ideas as stock or sector recommendations. Do further research of your own or talk to a licensed financial adviser before acting on the themes in this story).

Premier Investments needing a pause
Since 2012, Premier Investments has added 300 per cent in what has been a strong bullish trend to new highs. However, in recent months the stock has got ahead of itself with a parabolic move to almost $18.00.

Apart from the fact that these are rarely sustainable, the prior price pattern indicates the immediate trend has completed and we would expect a reversal of form over the coming year before a new upward trend takes hold and new highs made.

Typically, the expected pause could see prices pull back toward $12.50 and possibly, in the worst-case scenario, back to $11. There is a minor line of support in that region which provides additional confluence. Investors keen on the fundamentals are best to wait for better buying levels, although the larger degree trend is still sometime from taking hold. Patience is key.

 

Source: Premium Data

JB Hi-Fi consolidating at major highs
It has been a frustrating few years for JB Hi-Fi shareholders as prices have threatened to make a move above the 2010 highs but have just failed to break through. That said, the more times a major level is tested, the better the expected move will be.

JB Hi-Fi has a solid history of trending strongly when it gets a head of steam. The recent sideways movement in this $22–$23 range is a healthy pause and is quite common before a break higher. The fact that prices did not rise in a parabolic fashion like Premier Investments and have instead taken some time to pause near this important line of resistance, bodes well for ongoing strength.

On the downside, if the broader market sentiment remains weak, we may be in for yet another disappointment. A close back below $21 would be a red flag for the bulls, and further weakness below $18 would bring prices around $15 into play.

Chart JB Hi Fi

Source: Premium Data

Super Retail Group not so super
From the GFC low, Super Retail put in a spectacular performance, rallying from $2 through to $14 in a reasonably smooth fashion. However, since then relative strength has weakened and the price has wobbled – initially losing 50 per cent of its value, attempting a weak recovery and now starting to trade lower again.

Indeed, the stiff decline down to $7 in late 2014 did significant technical damage and may be the start of a larger decline that occurs in three stages. The moderate bounce through 2015 recovered 61.8 per cent of the decline, which is typical of a bearish bounce. The second stage, and more importantly its failure, solidifies our thinking that prices will now continue lower in the third stage.

From a pure technical standpoint based on the price progression to date, the worst-case scenario points to an extended move to $5. Although there is moderate support at $7, any breach thereof will be bearish. However, we are realists and with current fundamentals remaining seemingly positive, we need to be on alert for buyers stepping in again at levels deemed to be good valuations.

Buyers (and sellers for that matter) leave footprints in the market by way of volume. Volume is the fuel that drives price and the close represents the effort either party is imparting on the market. In November 2014 we saw buyers put in a lot of effort, meaning investors were accumulating.

Just a few weeks later when prices dipped again to those levels, volume was a lot lower, meaning this time sellers had weakened, which opened the way for prices to rise. This is known as background strength because it has occurred in the recent past.

Logic suggests that if buyers were keen back then, if the same opportunity arises they may present themselves again – unless their reasons for buying has since changed.

If the fundamental outlook remains similar, it is a fair assumption that those same buyers will return.

Chart Super Retail

Source: Premium Data

Myer still struggling
In late 2014, Myer’s price broke through a major line of support at $1.50 and has been unable to lift since. There has been a moderate rise in recent times from $0.82 to $1.26, but the pattern is a familiar trait of a bear market bounce and not of a new trend higher.

In the best case we can only see sideways price chop for many months below $1.20. However, new lows should not be discounted and considering the trend since 2010, these are probable.

Chart Myer

Source: Premium Data

About the author

Nick Radge is head of trading and research at The Chartist; He has more than 27 years experience in financial markets, from the trading floor of the Sydney Futures Exchange to international dealing desks in London, Singapore and Sydney. He has authored several books on trading and investing, including his bestseller, Unholy Grails - A New Road to Wealth.
Contact Nick on Twitter @thechartist.
 

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