Faraday Research: Supermarkets Falter at ‘Sell Zone’

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This week saw Morrison, Sainsbury, Tesco and Marks & Spencer all report. Accordingly, let’s take a look at the ‘state of play’ for British supermarkets.

First and foremost, the updates were, without doubt, bullish. Buoyed by growing UK retail sales all four reported like for like sales growth. Moreover, Tesco increased their market share for the first time in 5 years and Marks and Spencer saw growth in its clothing business for the first time in nearly 2 years.

However, for us, these weren’t the major talking points. Interestingly, nor was it that here was another raft of data defying the doomsday post-Brexit predictions.

Instead, it was the acknowledgement that the vicious and seemingly ever ongoing Sterling selloff will soon start to bite. As an importer of inflation it won’t be long until the UK sees inflation rising on the back of the weaker pound.

With the sector currently in the midst of a pricing war the prospect of further margin squeezes is the last supermarkets want. To this point, demand elasticity (i.e. demand sensitivity to prices) is clearly playing on managements and investors minds and we are seeing it in the price charts.

See below for the 9 Month Daily Candle chart of the FTSE 350 Food & Drug Retail Sector.

As the chart highlights a clear resistance zone has formed from October onwards. On several occasions prices have rallied to this zone only to roll over – the failures to break this zone is an indicator of the significance of this level.

Focusing on the here and now we note that recent price action has seen the index burst through this zone only to retrace back lower in the coming sessions. However, with prices still hovering just below this key level we are not looking to trade the false break as of yet.

Of course, were prices to subsequently break and hold above this zone in the coming sessions then this would undeniably represent a change in market structure. However, what looks more likely as it stands, is that the resistance level will hold. Furthermore, with Teresa May talking about Brexit on Tuesday we also have a clear potential catalyst for further Sterling weakness.

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