The stock that stood out in yesterday’s trading was Walmart Stores (NYSE:WMT). The world’s largest company by revenue experienced its worst day in 30 years, its shares plunging $10.67, or 10.18%, to close at $94.11, after its earnings results were made public.
Its $1.333 adjusted EPS missed the $1.37 forecast, although the $136.3 billion revenue beat the expected $134.9 billion estimate and US same-store sales increased for a 14th consecutive quarter by 2.6 percent versus the estimated 2.2 percent.
So, what went wrong? Why was the selloff so severe, if sales and revenue are growing?
The reason is online sales. They grew only 23 percent, less than half the growth of the prior quarter’s 50 percent.
Why are online sales so important? Let’s look at the following chart.
On July 22, 2015, the price of Apple (NASDAQ:AAPL) stock opened at $8.76, or 6.7 percent lower, even when results beat estimates (including the EPS, which wasn't the case for Walmart). The price fell because of disappointing numbers for the Apple Watch. Why did that have such an impact?
When the iPhone was released on July 29, 2007 it changed the world. By 2015, iPhone was a “has been” in terms of contributing to the company's growth. The iPhone already made the company and its shareholders a fortune. Investors are forward-looking, and they want to see what the next big thing is. They were hoping the Apple Watch would be that.
When its sales numbers disappointed, investors realized the Apple Watch won’t change the world like the iPhone did. So, they sold off the stock, all the way down to $92, by August 24. In less than a single month, the stock lost $38.75, or 29.6 percent, because investors couldn’t see future growth.
For Walmart, future growth means online sales. Brick-and-mortar is the past.
Ecommerce is the future. Nothing proves that more than Amazon’s revenues (including from Whole Foods) jumping nearly 40 percent in the latest period. If Walmart can't prove it has a future with online sales, the stock will only continue to decline.
On February 5, the price fell below its uptrend line since October 2, as the broader market collapsed when spiking yields had investors rotating out of risky stocks and into secure, now-higher-yielding bonds. The price completed a return-move, until it reached the levels of the selloff beneath the uptrend line and fell again, below both the initial selloff consolidation, as well as the 100 dma. More importantly, the decline executed a trend reversal, as it formed a second, lower trough, completing the minimum required 2 peak and troughs for setting a trend. In this case, a downtrend.
The price is presumed to keep falling within the downtrend, at least until the flatter uptrend line since January 2017. And who decided to show up to said uptrend line? The 200 dma (red), in a demonstration that the next major supply-demand intersection are those levels, at around $87, per the current angle.
Trading Strategies – Short Position Setup
Conservative traders may wait for a fall below the uptrend line since January of last year, guarded by the 200 dma, before entering a short.
Moderate traders may wait for a return to the new downtrend line (red) since January 29, 2018, or the psychological $100 level, where a presumed resistance await, as supply would increase.
Aggressive traders may short now.
Equity Management
Stop-Losses (above levels):
- $95.05 – 100 dma (blue)
- $98 – support-resistance line since November
- $100 – psychological round-number
Targets (above levels):
- $92.00 – November gap-bottom support
- $88 – expected angle of uptrend line.
There are many trading strategies available for the same instrument in the same time. A trader must establish a plan, which would include his resources and temperament. This is crucial and determines success or failure.
Pair entries and exits should provide a minimum 1:3 risk-reward ratio. They should suit your time frame, with the understanding that the further the prices the longer it will take to achieve them. Finally, understand that these guidelines are probability-based, which means by definition they include losses on individual trades, with the aim of profits on overall trades.