Amazon Can’t Kill Retail

Traditional retail is not dead.

Oh sure, Amazon has changed the way consumers shop. The online behemoth has crushed its brick-and-mortar competitors. It has depressed profit margins in every product category in which it operates. It’s the main reason the retail sector is underperforming the S&P 500 by 20% so far this year. And Amazon gets much of the credit for the bankruptcy risk in stocks like Sears (SHLD) and JCPenney (JCP).

But Amazon can’t kill everything.

Price and convenience are not the only two factors that affect consumer behavior. If they were, then nobody would ever go to a Major League Baseball game. It is more convenient, and certainly cheaper, to watch our favorite teams on the television in our living room.

Nobody would ever go to a concert. We could download the same “product” from iTunes at a fraction of the price.

There’s more to these events than just price and convenience. It’s about the experience.

And, for a very large portion of the population, shopping is about the “experience” as well. Granted… there’s not much to experience by running to the local drugstore to pick up dental floss, deodorant, and toilet paper. So, at least in my household, we do buy a lot of that stuff online.

But for the more important purchases – like clothes, sporting goods, appliances, power tools, and a whole bunch of other stuff – we go to the mall.

For my wife and kids, shopping for “back to school” clothes isn’t a chore. It’s an event. It’s a chance for them to hang out together. They look forward to it. And, it just wouldn’t be the same if done on a desktop computer at home.

Same thing with Christmas shopping, or buying birthday presents. The price and convenience of online shopping just doesn’t match up to the experience of doing it “live.”

For that reason, there will always be malls. There will always be department stores.

As more mall operators and more brick-and-mortar retailers work on improving the experience for customers, the consumer shopping pendulum will swing back the other way. And retail stocks – beaten down to historically low valuations on the perceived threat that Amazon will put them all out of business – will start to come back to life.

Investors who start sifting through the retail dustbin right now are likely to be rewarded over the coming months as the Christmas shopping season turns out better than expected, and over the coming years as the rumors of the death of retail turn out to be greatly exaggerated.

Best regards and good trading,

Jeff Clark

P.S. Do you think that retail will turn around, and stick around? Or will Amazon eventually replace it? Send me your thoughts – along with any questions or suggestions – right here.

Reader Mailbag

Is there was something magical about the “first hour of trading”? You refer to it on a continuous basis on the Delta Direct updates.

Is there anything traders could glean from your understanding of what really goes on in that “first hour of trading”? Is there a certain mindset with which you approach the first hour of every session? Do you have any recommendations for what we need to be looking for every first hour of trading as investors?

Is it more than simply letting the dust settle – and then reading where it falls? It seems like it should be more of a continuum with premarket charts and all.

Does the first hour tell you what to expect from the market for that session simply based on personal experience and intuition? Is an hour just a natural break to stop and take stock (pun intended)?

Thanks so much.

– Clarissa

Thanks for the question, Clarissa.

The first hour sets the tone for the trading day. If there’s a lot of volatility and lots of action during the first hour of trading, then we’ll most likely get lots of volatility throughout the day. If the first hour is quiet, then odds are the rest of the day will be quiet as well.

The first hour also sets the parameters for any potential daily breakout or breakdown in the S&P 500. For example, if the S&P makes a higher high on the day after the first hour of trading, then it almost always leads to more strength later in the day. If the S&P makes a lower low after the first hour, then traders can look for weakness later in the session.

It doesn’t always work out that way, of course. But it happens often enough to give an edge to traders who pay attention to the range of trading during the first hour.

– Jeff