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Dillard's Quest for All-Time Highs Could Find Assistance from Shorts

Lofty levels of bearish sentiment may have bullish implications for DDS

by 6/19/2012 1:50:45 PM
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The noise on Wall Street can make it exceedingly frustrating for both novice and seasoned traders alike to sift through the commotion and find their focus. At Schaeffer's Investment Research, our three-tiered methodology of combining technical, fundamental, and sentiment analysis dubbed Expectational Analysis« is a tried and true approach to cut through the chatter. At its most basic level, Expectational Analysis« takes a contrarian approach to look for stocks whose price action does not correlate with the prevailing opinion held by the Street. Take fashion concern Dillard's, Inc. (DDS - 68.95) for example.

This technical outperformer has sprinted up the charts in 2012, jumping more than 52% higher in that time. The security's impressive rise is highlighted by its 80-day moving average. After tagging a fresh all-time high of $72.46 on May 11, the stock pulled back to this supportive trendline and bounced.

Daily Chart of DDS since January 2012 With 60-Day Moving Average

Despite DDS' formidable display of price action, sentiment surrounding the stock is teeming with pessimism. Over in the options pits, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open a mind-boggling 135.41 puts for every one call in the previous 10 sessions. Not surprisingly, this ratio ranks just two percentage points shy of a 52-week peak, suggesting bearish bets have been scooped up over bullish at a near annual-high pace in recent weeks.

Additionally, the stock currently sports a Schaeffer's put/call open interest ratio (SOIR) of 1.54. This ratio ranks higher than all other such readings taken in the past year, implying short-term traders are more put-heavy now than at any other time over the past 12 months.

Elsewhere, short sellers reduced their bearish exposure by 40% during the last month. However, short interest still accounts for 15.2% of the stock's available float. It would take more than a week to cover these shorted shares, at DDS' average daily trading volume.

Having peered into the stock's technical and sentiment indicators, let's take a look at DDS' fundamental backdrop before putting the Expectational Analysis« puzzle together. Specifically, the Arkansas-based clothier is scheduled to go ex-dividend on Wednesday, June 27. Bear in mind that a stock going ex-dividend lowers the value of a call, but raises the value of a put, as the stock price adjusts to accommodate for the dividend payout.

Taking the equity's technical, sentiment, and fundamental backdrops into consideration, the stock may be poised for a contrarian boost in the short term. Despite DDS' impending dividend payment, the 5 cents per share should have a mild impact on the security's price. Therefore, as the security continues to climb up the charts, additional capitulation by skeptical players could push DDS further into all-time high territory.

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