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Brand Face-Off: American Eagle Outfitters vs. The Gap Inc.

Evaluating AEO and GPS from technical and sentiment viewpoints

by 2/24/2014 12:18:48 PM
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Specialty apparel retailers American Eagle Outfitters (NYSE:AEO) and The Gap Inc. (NYSE:GPS) have charted very different courses during the past year. While AEO has shed nearly 33% to trade at $13.85, GPS has tacked on a cool 35.5% to rest at $43.30. Moreover, while American Eagle has underperformed the broader S&P 500 Index (SPX) by 15 percentage points during the past 60 sessions, The Gap has outperformed the index during the same time frame.

Turning to the charts, we notice trouble ahead for AEO, which appears to be on a collision course with its descending 32-week moving average -- a trendline that pressured the shares lower in the not-too-distant past. By contrast, GPS recently bounced off of its ascending 80-week moving average, putting the stock within striking distance of its nearly 14-year high of $46.56, which was touched last August.

Weekly Chart of AEO since September 2012 With 32-Week Moving Average

Weekly Chart of GPS since September 2012 With 80-Week Moving Average

Interestingly, sentiment on the rival brands doesn't line up with the aforementioned technicals as one might expect. For instance, at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), AEO has racked up a 10-day call/put volume ratio of 12.76, with almost 13 calls bought to open for each put during the last two weeks. This ratio nearly sits in the top quartile of readings from the last year, indicating speculators have initiated calls over puts at a faster-than-usual pace recently, despite the shares' struggles (though some of this may be the work of short sellers hedging their bearish bets).

By contrast, in spite of GPS' technical strength, the equity's 10-day ISE/CBOE/PHLX call/put volume ratio checks in at just 0.69, as put buyers have outpaced call buyers in recent weeks. If that's not enough, the ratio is higher than just 14% of comparable readings from the previous 12 months, suggesting the rate of call purchasing (versus put buying) has been sluggish, relatively speaking.

On a similar note, American Eagle's Schaeffer's put/call open interest ratio (SOIR) registers at 0.19, with call open interest outweighing put open interest by a more than five-fold margin among options expiring in the next three months. Looking back one year, the stock's SOIR has never been lower, conveying an extreme preference for short-term calls over puts right now. On the other hand, The Gap's SOIR of 1.07 is higher than 71% of other readings from the past 52 weeks, pointing to a stronger-than-normal bias toward puts.

Based on all of the factors considered above, American Eagle Outfitters (NYSE:AEO) could be in trouble, while The Gap Inc. (NYSE:GPS) looks like it's in a good position. Specifically, AEO could suffer if the option bulls begin hitting the exits, due to the stock's long-term technical difficulties. By contrast, GPS -- the clear winner of this Brand Face-Off -- has posted a solid on-chart performance, which could benefit from contrarian tailwinds down the road as put buyers unwind their bearish bets.


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