Retail stocks have been crushing the broader market over the past month, and options traders are getting even more bullish.
For months, market experts have been sounding the alarm on the retail apocalypse. As Amazon wields its mighty influence over multiple industries, it's been all but assumed that many traditional retailers will lose a huge chunk of value, if they survive at all.
But against all odds, retail stocks have been mounting a silent comeback in the stock market over the past month. Foot Locker, Macy's, and Gap are the three biggest gainers in the S&P 500 during the period, surging more than 28%.
Meanwhile, on a sector basis, three of the top six best-performing industries in the last month are in the retail space, out of 24 groups. They've each climbed more than 5.9% during the stretch, smashing the benchmark S&P 500's gain of just 1.5%.
And, in a development that's perhaps the most telling of all, traders are getting more confident about further increases. Their piqued interest can be seen in a measure of outstanding options on an exchange-traded fund tracking the retail sector. Open interest on the SPDR S&P Retail ETF has risen to more than 530,000 contracts, the most since January 2014, according to data compiled by Bloomberg.
In a sign that those traders are using those additional contracts to get express more confidence in retail, the ratio of bullish options to bearish ones has climbed sharply. Further, a measure of investor positioning known as skew shows that investors have been paying less for downside protection.
So why the sudden change of heart for investors? For one, it's possible that they've been encouraged by recent turnaround efforts by traditional retailers. Perhaps the most resilient company has been Walmart, which smashed analyst expectations during the third quarter after growing its online business.
It's also within the realm of possibility that traders think retail stocks simply got oversold. After all, Macy's and Foot Locker — two of the success stories mentioned above — were down more than 50% year-to-date before their recent rallies.
Regardless of the true reason, it's clear that retail is enjoying a rare patch of strength. And while the long-term future of the industry is still very much up in the air, it's an encouraging sign that traders are betting on continued resilience.