Last week Real Vision reached out to see if I could fill in last minute for an opening they had. I gratefully accepted as I was happy to take on the challenge of preparing a Trade Ideas thesis in less than 24 hours. I wondered if people cancel their interviews during volatile environments like the one we’re in. I’m sure they do, but as technicians we can always find pockets of strength offering asymmetrical reward/risk, even if we have to look outside of US Equities.
Right now, the major US Indices are stuck sideways in a multi-year range, but there are still opportunities in the right areas, we just need to be more selective and conservative in terms of managing our risk. Utilizing our top-down approach, we always want to invest in areas of the market and individual names that are outperforming. One way we do this is by looking through a variety of watchlists regularly, and besides the charts themselves, also analyzing different metrics such as the security’s percentage away from key highs (such as 52-week or all-time) as well as return data over various timeframes.
Recently, by looking at watchlists of the Dow Industrials, US ETFs and Dow Jones Industry Groups it became clear that one of the hottest areas right now is the Restaurant & Bar Industry. In this post I summarize and expand on my Trade Ideas interview and provide some additional setups in the space.
Finding Relative Strength in Restaurants
So, what in the world would pique my interest in the Restaurant & Bar Industry? Simple, McDonalds’ chart and recent strength relative to the Dow.
One easy way to identify the strongest stocks is by looking at how they’ve performed since the market topped last September/October. McDonalds is not only the 2nd best performer in the Dow, +22% since the average peaked on October 3rd, but it’s also one of few components trading at all-time highs.
Looking outside the Dow, there are plenty of strong names throughout the Restaurant and Bar Industry. In fact, the two second largest components, Starbucks (SBUX) and Yum Brands (YUM) also hit new all-time highs in the last month. The performance chart below shows a handful of popular restaurant stocks that are also beating the broader market since last year’s top.
During the same period where the Dow is down 3%, these restaurants have returned as much as 65% in the case of Chipotle (CMG) and over 40% for Denny’s (DEN) and Starbucks (SBUX).
Here is a chart of the Dow Jones Restaurant and Bar Index ($DJUSRU) relative to the S&P 500 ($SPX). This also does a good job illustrating the recent strength from the space as $DJUSRU is breaking out of an 8-year base to new all-time highs vs the S&P 500.
With the Industry breaking out of such a long-term consolidation, this could be the start of a new structural trend in outperformance. Now that we know we want to be invested in the space, here are the best setups we’ve identified to express our bullish thesis.
Wingstop and Other Appetizing Setups
First is Wingstop (WING), which was the trade idea I discussed on Real Vision. This is my favorite setup as the stock has been exhibiting relentless strength over the last two years. We like Restaurants and Bars because they are outperforming the S&P, but what are the individual stocks that are outperforming the industry group itself? As you can see in the chart below, WING is one of them.
The top pane shows WING making new all-time highs relative to the S&P just last week. The bottom shows it consolidating just below all-time highs from last year relative to the Restaurant and Bar Index. As both are within the context of long-term uptrends, we expect the consolidation relative to its industry group to resolve higher just as it did relative to the S&P.
WING made a new all-time closing high at 79.86 yesterday. We like it on a breakout above the 80 level with a target at 102.50. Defining our risk at 2018’s high and recent low around 74.20 gives us a reward/risk of 4x. Our price targets for these setups are all based on fibonacci extensions from their 2018 drawdowns.
Darden Restaurants also made a new all-time closing high yesterday and offers a favorable setup with risk well-defined at 2018’s closing highs ~119. We can be long at current prices ~122.90 with a target at 139.
We also like Denny’s (DENN) on a break above recent highs ~19.95 with a stop at Q1’s highs ~18.75.
Wendy’s (WEN) also offers a skewed reward/risk setup at current prices with risk defined at 2018’s highs and recent lows just above 18.20.
If you’re hungry for gains in a trendless market, I’d suggest nibbling on some of these setups. With prices sitting just above key prior highs, we can limit our risk to the downside while participating in strong uptrends. Thanks for reading and feel free to contact us with any questions or feedback!