I wonder if investors will stop selling Costco’s stock, if the warehouse retailer starts selling Joan Rivers’ new book.
There’s probably no relationship between the septuagenarian commediene’s decision to handcuff herself to a shopping cart at a Costco Wholesale (NASDAQ: COST) location as a publicity stunt, err, protest against the store’s refusal to sell her latest book, and the fact that investors have been quietly but steadily unloading shares of the stock for more than a month.
But that’s where Costco investors and bewildered Costco shoppers in Burbank, California found themselves this week. Just as Costco, in the words of the aggrieved Ms Rivers, “sells Paul Dean books which are not good for their customer’s health” but won’t sell her latest opus, I Hate Everything … Starting With Me, so are Costco investors heading for the exits in an orderly profit-taking that may not remain orderly for long.
Shares of Costco have had three multi-day sell-offs in the last month alone. These pullbacks haven’t taken the stock to significant new lows. But they have helped take the steam out of the stock’s most recent rally from early June, and may convince more active investors that the time has come to lock in gains. And should current selling beget additional selling, the result could be, at a minimum, a stretch of sideways trading in the shares over the next few weeks.
Even a more serious correction would not be the end of the world for the stock’s bull market. The fact of the matter is that Costco has been in a strong uptrend since the generational lows of 2009. Blighted by only two significant instances of sideways trading over the past three and a half years, shares of Costco have returned more than 125%, including the stock’s gain of well over 12% in the last two months.
That said, each time the stock has pulled away from this major trend by more than 30%, COST has tended to underperform over the next 4-6 weeks. This was the case in November 2009, leading to a 9-month bear market in the stock. It was also true in May 2011, when another run-up in Costco shares was followed by a 12% decline over the course of the following summer.
Why bring this up? Well, even with the stock’s Thursday retreat – marking Costco’s fourth lower close in a row – shares are once again trading more than 30% above trend. The stock was only recently trading at new, 52-week highs, but a period of underperformance over the balance of the summer and into the fall may be next.
Even basis the trend from more recent lows in 2010 or in 2011, the move in Costco looks overextended in the near-term. Again, this does not preclude higher prices in the stock months from now. But between now and then, the multi-day sell-offs over the past several weeks as the stock trades near long-term highs, suggest potentially the beginning of a broader and more thorough distribution as traders and investors take profits in what has been one of the better performing stocks over not just that past two months, but the past two years, as well.
Heading into trading on Friday, shares of COST are at new, two-week lows. Any significant selling at this point likely will take the stock into short-term oversold territory, also. And traders hoping for the same sort of short-term move higher that happened during COST’s last pullback in late July may see an opportunity if any end of week selling takes the stock low enough. Historical support does begin to develop for Costco shares near the $93.75-94.25 area. But if the stock is truly due for a distribution period, an initial move lower to $92 may be where buyers will look to make a stand.