Why I Love Trading the Retailers

This morning, in a generally strong market, and especially strong market for retailers, Zumiez (ZUMZ) has been dropping like a stone.  Here's a two-week chart (30 min. bars) of XRT, the SPDR S&P Retail ETF:

Here's Zumiez (ZUMZ), same scale:

There's no hard news on the tape for ZUMZ, but Piper Jaffray (PJC) has a research note out, and has downgraded ZUMZ to neutral from outperform.  I haven't seen the note, but for the stock to be down big in a good market, the opinion must be pretty bad, and the data must be pretty solid.

Ever since August 2000, when the SEC instituted Regulation FD, it has been exceedingly difficult to be a consistent winner as a purely technical trader. Prior to that, it was possible to figure out what the "smart guys" were doing by reading the charts, and looking for clues in price and volume action. The charts gave us a graphical picture of big money psychology and information flow. A savvy trader could piggyback on the big money by trading the charts (moving ahead of the public), and make nice profits by "selling the news" when important announcements (earnings, patents, FDA approvals, etc) were made.

This selective information flow has been completely cut off by Regulation FD. Corporate insiders are a weaselly bunch, but they're not going to risk a big fine or jail time by "spilling the beans" on earnings to a buddy over a 3-martini lunch. So, analysts, street touts, mutual funds, and other "wise guys" are in the same boat that the public is; they're left to read the tea leaves by pawing through publicly available information such as SEC filings, newspaper and magazine articles, online news sources, message boards, and rumors. It's still possible for smart guys (big and small money) to beat the market, but you can no longer do it with non-public information. (Except for crooks like Raj Rajaratnam, Roger Blackwell, Joe Nacchio, Martha Stewart, and U.S. Congressmen.)

There is one exception: the retailers. If you are a low-paid manager of a Zumiez store in Smallville Mall, you have some pretty valuable information at your fingertips: sales, margins, comparisons to last year for your store. And if you are a hard-working analyst at Piper Jaffray who has a network of fifty of these managers in his Rolodex (does anybody really use Rolodexes anymore?), you have a pretty damn good picture of how the company is doing, with no need for information from the CEO. In fact, you may have better information than the CEO! Look for ZUMZ to close down a few percent today on higher than average volume, and for the company to be down even harder on the next same-store sales or earnings announcement.

Consequently, if you read your charts closely, you will notice that the average stock tends to show big moves on heavy volume, and lots of sitting around on light volume in between...no follow-through. Retail stocks, on the other hand, tend to be better behaved, moving in gentle arcs and holding their trend lines for longer periods. These stocks do follow through on breakouts and breakdowns. This is why I love trading the retailers, it's still possible to beat the market using pure technical analysis. Tweet