AMZN Vs. BBY: The Death of Big Box Retail

By Joshua Enomoto, Founder of ContangoDown.com and CrushTheStreet.com Contributor

If 2006 was the year of the sub-prime mortgage crisis, followed by the global financial crisis of 2008, then it would stand to reason that 2013 (or some point in the near future) would be the credit crisis, as many of the underlying fundamental drivers that created the initial dilemma were never resolved. Indeed, I speak of nothing new here, as the negative divergence between personal income and savings has been covered through most of the alternative media spectrum. If such a phenomenon continues to run its logical course, a major recession (or depression) will result, as well as a significant decline in the very industry that depends on personal credit: online retail.

Everybody is in puppy love with Amazon, the darling prince of the online retail industry. Its financials glow greener than overcooked plutonium. Its business model is fast, convenient, and you never have to leave home to enjoy the spoils. Of course, this has had a deleterious effect on its competitors, who are considered cumbersome and bulky in the iWant, iBuy, iNow paradigm that we live in.

However, its technical picture speaks of a different story:

What’s really interesting is the strong correlation between Amazon shares (AMZN) and the S&P 500 index ($SPX), itself a prime candidate for major correction. The way that both AMZN and the $SPX drag along in their journey upward in a jagged manner suggest tiredness in their bull market. The discrepancy between the rising price and the declining volume is a technical confirmation that a correction could be due.

In fact, the fundamentals suggest that we may get this correction sooner rather than later: a recent Yahoo! Finance article enters into the journalistic fray with the headline “Obama Fears ‘Catastrophic’ Debt Fight.” This is in reference to the next big political dogfight of the debt ceiling and sequester cuts, which must be resolved by the end of February. If comments concerning hesitation to continue quantitative easing from a cold-footed, no-name geezer from the Federal Reserve was enough to send markets in a temporary free fall, you can surely expect continued volatility with sequestration debates. Even that word itself sounds like it came straight from the pages of the King James Bible and likely to incite fear into the heathen masses!

So do I believe that a pullback in Amazon is likely? Absolutely! In my opinion, this is a short-term shorting opportunity, but you have to be extremely careful and disciplined as the price can swing wildly while Washington plays chicken with the economy. Use your technical analysis and define your tactics clearly, knowing beforehand what to expect (realistically) as an entry point as well as an exit point.

And what to make of Amazon’s lumbering competitors? They are down, but definitely not out.

Let’s take a look at Best Buy, or ticker symbol BBY:

There’s no demand!

And you would be right. BBY has dropped like the proverbial rock and is essentially attempting to find the bottom of financial perdition. Subsequently, its shares have a negative correlation with the $SPX, along with the other major indices, and all technical indicators point to a complete lack of optimism, nary the pretense of sanguinity.

So why mention Best Buy? First, because Amazon’s continued rise is in technical danger, and second, a bottom may be close to forming for BBY: its long-term chart whispers of a potential opportunity.

From a technical perspective, Best Buy’s decline should have been of no surprise: its price action charted a complex Head-and-Shoulders pattern, which is one of the more reliable patterns in technical analysis (Elliot Wave Theory). Currently, the price is below the neckline so we can assume that, as long as the company remains a viable business entity, much of the downside has been accounted for. Based on historical trends, long-term support at $10 or even $5 represent logical points that could be challenged. However, if bullish momentum enters into this sector, the first resistance point would be the neckline, or roughly $20. Even at current valuations, this would represent a 60% move.

However, humans being who they are, tend to be overshadowed by the negatives rather than the positives and it is a reasonable psychological trend, given the inherent corruption in the fiat system. In other words, there has to be a significant fundamental reason why anyone would want to invest in Best Buy. After all, studies show that foot-traffic to brick and mortar retailers is steadily declining, and insiders within the industry sneer that Best Buy is simply a free showcase for Amazon’s sales teams. If we are to believe, though, that a credit crisis is soon on the horizon, we will have to assume that there will be a major paradigm shift in the way consumers operate. Currently, American consumers are spending like there’s no tomorrow, and easy-sleazy credit led by Ben Bernanke’s Fed is at the helm of this fiat wonderland. The despair of 2006 and the fear of 2008 are all but a fading memory, but when the inevitable fist of consolidation knocks out the markets, an immediate and universal epiphany coerced by necessity will rise. People will cut up their credit cards and will spend carefully and deliberately. Cash transactions will increase, and that inevitably negates online sales.

It is also known (for the most part) that the movie industry is recession proof. During hard times, people seek an escape and watching movies relieves collective mental stress. However, the very act of just getting out of the house and going somewhere and doing something is a critical component of maintaining positivity in an otherwise pessimistic circumstance. Physical retailers will be able to provide intrinsic entertainment value to a downtrodden society and therefore, an increased opportunity for sales. Combining this with technical trends, an investor should be careful before fully writing off a potentially profitable industry.