Retailers get plenty of attention on Black Friday and throughout the entire holiday season. Even without holiday buying sprees, the attention would be warranted this year.
The consumer discretionary sector, home to a number of the biggest and best-known retailers, is the third-best performer in the S&P 500, on a year-to-date basis. The sector is down 2.6%, while the benchmark index itself has fallen 7.62%.
Discount retailers have been a bright spot lately, in terms of stock price performance.
S&P 500 component Family Dollar (FDO) has been pulling back in recent weeks, but the retreat has been orderly. Downside volume has come in well below average, indicating that investors are just paring back on their holdings, rather than stampeding for the exits.
In addition, the stock has gotten support at its 10-week line. If that support holds, it would be a further sign that Family Dollar is just taking a breather, rather than setting up for a big selloff.
An even better performer from the discount sub-sector is Dollar General (DG), which is also holding above its 10-week line.
The company's story has improved over the past year, as it revamped store operations, focusing on the merchandise mix and retiring underperforming locations. Year-over-year sales growth, which dropped to 9% in the quarter ended in January, has rebounded to double-digit rates more recently.
In February, the stock gapped up 21% on news that investor Nelson Peltz was trying to muster support for a buyout. However, as that transaction seemed increasingly unlikely, the stock corrected in the summer, along with the broader market. As of Friday, Family Dollar shares were trading just about where they were after that February price jump.
In September, Peltz said he would not pursue a hostile buyout, in exchange for a board seat and other concessions.
Analysts believe lower gas prices have helped discount retailers, as the stores' price-sensitive consumers now have a few more dollars available for shopping. In addition, the wider trend of high unemployment has meant business shifting away from big-box retailers and toward deep discounters.
Dollar General reports its third quarter on Dec. 5, and analysts are expecting income of $0.47 a share on sales of $3.57 billion. Those would mark year-over-year gains.
The stock, which went public in November 2009, rallied to an all-time high of $40.71 on Oct. 26, but the upside trade leading up to that peak was in light turnover. Weekly volume has come in below average since late September.
Low-volume rallies are often a signal that a stock's price is getting ready to top, and that's exactly what happened. The stock is down 3.1% so far in November, but that's less than the S&P 500's 6.8% decline. Volume during Dollar General's consolidation has been muted, a good sign as a stock digests previous gains.
Another company named after the greenback, Dollar Tree (DLTR), has also been consolidating, and is trying to retake its 10-week line.
Earnings growth has slowed in the past couple of quarters, but analysts expect solid increases in the next two years. Income for 2012 is seen coming in at $4.01 per share, up 24% from this year. A further gain of 18% is expected in 2013.
Earlier this month, the company completed acquisition of Canada's Dollar Giant chain. Growth through acquisition has been a key Dollar Tree strategy, although some analysts caution that the company may face integration risks ahead.
For the moment, I'm using extreme caution with any buys, given the overall market weakness. As these stocks consolidate in healthy fashions, they bear watching, as they may be setting up for gains when the major indices return to rally mode.