There's an Ollie's discount store down the road from my neighborhood in Canton, Georgia.

It sits in a strip mall that's usually pretty quiet. There's no big-name store like Target anchoring the property.

But lately, every time I drive by, I've noticed something.

The parking lot is filling up!

So when the stock popped up in my research process this week, I took note.

Because that busy parking lot is telling a bigger story about what's happening with American shoppers right now. That story is setting up one group of stocks to win this holiday season and another group that could get hurt badly.

Prices Are Still Climbing

On Tuesday morning, the government's latest inflation report came in hot.

Consumer prices rose 0.4% in October, more than economists expected. "Core" prices, which strip out food and energy, rose 0.3%. That was also higher than expected.

Because of this hot inflation reading, traders now see a rate hike from the Federal Reserve in December as all but certain.

Gas prices have finally dipped below $4 a gallon. But they're still about 19% above where they normally are this time of year.

For many families, prices are still rising faster than paychecks.

Middle-class and lower-income households feel that squeeze the most. And with the holidays coming, they're trying to make limited dollars stretch further.

Not All Retail Stocks Will Get Hurt

Now, a challenging backdrop for consumers doesn't mean every retail stock is in trouble.

In fact, this is good news for a certain kind of retailer.

When money gets tight, shoppers don't stop buying. They trade down. They look for stores that make them feel smart about how they spend.

That's exactly where Ollie's Bargain Outlet (OLLI) shines.

Ollie's buys up other companies' extra inventory (overstock, closeouts, discontinued items) and sells it at big discounts. Its slogan is "Good Stuff Cheap."

The company is attracting more customers who need to stretch their budgets. And it has built a loyal relationship with them through its "Ollie's Army" rewards program.

Wall Street is starting to notice too. An analyst upgraded the stock on Monday.

And just look at the chart.

OLLI fell from last year’s high above $140 to the low $60s this spring and summer.

But since then, the stock has climbed back above its 200-day moving average (the blue line), a key long-term trend line. And its 50-day moving average (the green line) is turning higher.

This is what it looks like when investors start buying a stock again.

It's not the only one. Discount retailers Walmart (WMT) and Ross Stores (ROST) are also holding up well. 

The Other Side of the Holiday Shopping Season

Here's the thing about stretched shoppers.

Many of them are still spending. But they're putting more of it on credit cards.

According to The Daily Shot, consumer credit growth jumped recently, and credit cards led the way.

That brings us to credit card companies. And it's important to know that not all "credit card stocks" are the same.

Visa (V) and Mastercard (MA) run the payment networks. Think of them as toll roads. They collect a small fee every time you swipe your card. But they generally don't lend the money.

So if a shopper can't pay their bill, Visa or Mastercard doesn't take the loss.

Capital One (COF) and Synchrony Financial (SYF) are different. They're lenders. They make the loans, often at very high interest rates, and they take the hit when borrowers fall behind.

(Capital One now owns the Discover network too, but its core business is still lending to consumers. And Synchrony is the bank behind many store-brand credit cards.)

I've never loved this business model. The most profitable customer is often the one who's struggling the most.

And right now, more customers are struggling.

A Warning Sign Worth Watching

Every month, the Federal Reserve Bank of New York asks consumers a simple question: what are the odds you'll miss a minimum debt payment over the next three months?

Here's how the answers have changed.

Consumers now put those odds at nearly 14%.

That's up from about 10% a few years ago. And outside of the 2020 pandemic spike, it's near the highest level of the past decade.

Keep in mind, this isn't about paying off a balance. It's the minimum payment—the smallest amount you can pay to keep your account in good standing.

And remember that hot inflation report. If the Fed raises rates in December, most credit card rates will move up with it. That makes those balances even more expensive to carry.

Wall Street is starting to notice the difference. Visa and Mastercard are still in very strong trends. But Capital One and Synchrony are lagging.

Here's Capital One.

COF just slipped below both its 50-day moving average (around $203) and its 200-day moving average (around $200).

Buyers did step in when the stock dipped toward $190 this week. That level held as support in September and October too.

But if that floor gives way, the stock could have a lot further to fall.

What I'm Watching

Holiday spending will probably look fine on the surface. Shoppers will shop.

The real test comes in January and February, when the bills arrive.

If delinquencies and defaults pick up after the holiday season, lenders like Capital One and Synchrony could fall sharply.

So I'm watching COF and SYF as candidates for put options in my Income Alliance portfolio. A put option rises in value when a stock falls. It's a way to profit from a decline while knowing exactly how much money you have at risk.

But I'm not jumping in yet. I want to see a true break lower first, such as a close below that $190 support level for COF.

Until then, these stocks stay on my watch list.

Today’s Points to Watch

Inflation is hot. And consumers are still spending.

That's good news for bargain retailers like Ollie's that give their customers real value. But it's bad news for the lenders. At some point the bill comes due, and many consumers won't be able to keep up with their loan payments.

I'll keep an eye on that busy parking lot down the road. And I'll keep watching for the crack in the credit card stocks.

In the meantime, I'd love to hear from you.

Are you seeing friends and family trade down this holiday season? Where are you doing your shopping this year? Let me know at feedback@rudeawakening.info.