Retail Numbers May Spur Next Impulse Wave for Amazon

With the rapid growth of third-party sellers, Amazon.com (NASDAQ: AMZN) is rapidly becoming the one-stop shopping center for online retail sales.  Since the January 2012 start of the recently concluded 5-wave Impulse, Amazon's stock price went from a "mere" $167 up to a stratospheric $847 at its all-time peak.  A brief pullback has the stock now trading in the $755 range, however reports coming out of the retail sector leave us wondering if the pull-back will be short-lived and a new impulse wave is set to begin.

AMZN Weekly Chart

The weekly chart adequately sums up the tale of the tape.  The five impulse waves are easily drawn, and it's clear that no Elliott Wave rules were violated in the year bullish pattern.  The daily chart zooms into the current situation rather nicely.

AMZN Daily Chart

A 38.2% retrace of Wave 5 may have completed Wave A in the corrective move, but from there the picture grows a bit fuzzy.  As corrections go, especially for a stock trading near the limits of the upper atmosphere, this one is especially shallow.  While we can draw an A-B-C corrective pattern and then trace a flat correction from there, it simply doesn't fit the type correction one would expect.  Nonetheless, it's the correction we have before us. 

The question now is whether AMZN will continue to correct - i.e. move sideways - or if the end of this wave will result in a new impulse wave.  If the latter, will that wave be a bullish or bearish trend?  For guidance, we'll reference two news items that came out today. 

First, let's start with the competition.  Two large retail stores - Kohl's (NYSE: KSS) and Macy's (NYSE: M) - both reduced their overall 2016 guidance today.  Both cited a 2.1% slip in same-store sales, and as one might expect, shares of both are being hammered in after-hours trading. (The Street: Wall Street Punishes Macy's and Kohl's for Brutal Holiday Season.) To make matters worse, Macy's will close 63 stores by the spring of 2017.  It's part of a larger move previously announced, however it will cost the company $575 million in 2017 sales.

Well, based on this news, the Retail Sales numbers released on 15 January should prove interesting.  Given the extremely poor results being projected from these two retail giants, I'd be very hesitant to open a long position in that sector until both the retail numbers are out and any company in that sector in which I intend to go long reports their 2016 results.  The risk just skyrocketed.

So what does all this have to do with Amazon.com?  Well, it appears those buyers that didn't pass through the doors of Kohl's or Macy's may have let their keyboards do the shopping online.  (Reuters: Amazon Doubles Deliveries in 2016 for Third Party Sellers.) According to the report, Amazon did 50% more business for these fulfillment partners during the holiday season, and they doubled their business for the entire year.  Equally impressive, they saw 70% growth in the number of sellers using the fulfillment service for which Amazon takes a cut on every item shipped. 

The growth and profitability of this portion of the business is tremendous.  According to CEO Jeff Bezos, close to 50% of all items purchased on Amazon.com come from third party vendors.  The growth potential in this space is significant, especially with the rapid adoption of online shopping.  Year over Year, the company sold 5 million more items on Cyber-Monday alone, as compared to last year.  With the delivery troubles experienced a year ago apparently behind them, a solid earnings report after the close on 26 January may well launch another bullish five-wave impulse in a stock already in near-earth orbit.

Even if AMZN is out of the price range for many of us, we still need to pay close attention to this space.  Customers gained by AMZN are customers directly pulled from the brick and mortar retailers.  That will have a negative impact on those retailers, certainly, but also potentially on the REITs that specialize in that space.  On the flip side, it will be a boost to UPS, at least until Amazon finishes building out its own delivery fleets, an effort already underway.

Pay close attention to the retail sales numbers on 15 January, and factor those overall numbers into what the individual retailers are reporting.  As always, follow the money and we'll find some very interesting trades in the making over the short term.

Happy Trading.

June Retail Sales Add to Constently Good News This Month

The Commerce Department released the Retail Sales Report for June, and the estimate-beating increase continues to add to the increasingly good news coming out in each of this month's economic reports.  The combination of strong economic data, strong corporate earnings, and a lower forecast on interest rate hikes continues to drive the market indices to record highs.  Finally, it appears that the market is reacting to data, not hype.

Today's report underscored significant strength in each of the key areas:

• Sales at retailers and restaurants rose 0.6%.
• Sales year over year were up 2.7%, although when you subtract out automotive sales and auto parts, that year over year number becomes 0.7%.
• Sales of building materials and gardening supplies were up 3.9%.

With the current earnings season ending its first week, the retail sales report is very good news as we await some of the major players to report over the next few weeks.  Yum Brands already lead the way in the restaurant industry, although their report was somewhat lackluster.  They beat on earnings by only $0.01 and missed on revenue by $90 million.  As we saw for the first five months of the year, though, the growth rate across the industry was extremely sluggish, only surging in the June numbers.  Underscoring that trend, Yum Brands increased their guidance for 2016 forecasting full-year core operating profit growth to be at least 14%, up from last year's 12%.  The retail numbers released this morning support that guidance.

In the Automotive industry, we use Ford (NYSE:F) as the bellwether.  They report before the open on the 28th.  We'll be watching the seasonably adjusted annual percentage rate of cars sold, which, if  the retail sales report is any indication, should be a decent quarter for the industry.  Also keep an eye on Magna International, (NYSE:MGA) a Canadian automotive parts supplier that does business worldwide.  Their earnings report typically provides a fantastic overview of the health of the industry across the globe.  Their earnings date has not yet been announced, but we expect it to be before the bell either August 5th or 8th.

The surge in building materials and gardening supplies should be excellent news for the large home improvement retailers like Lowes (NYSE:LOW) and Home Depot (NYSE:HD).  They report August 17th pre-market and August 16th pre-market respectively. 

In addition to the specific stock projections we can glean from these numbers, there is also the signal that consumer confidence is on the rise.  That boost in spending should translate into a healthy nudge for the GDP, and with interest rates remaining low, we should also see an increase in corporate capital expenses and a corresponding increase in hiring.  All-in-all, it was a very positive report, and it bodes well for the overall health of the current rally.