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Retail Stocks Are Soaring on the Heels of Lackluster Sales

TJX, COH, and ROST are trekking higher

by 7/5/2012 2:31:20 PM
Stocks quoted in this article:

June same-store sales numbers were released today for many retail names, and although the numbers were less than impressive, price action in select stocks is very strong today. With the broad market flat on the day, the SPDR S&P Retail ETF (XRT) is currently up over one percent. A few of the names leading this charge higher are The TJX Companies, Inc. (NYSE:TJX), Coach, Inc. (NYSE:COH), and Ross Stores, Inc. (NASDAQ:ROST).

Looking at a chart of the retail ETF, you'll see strong price action that appears to be breaking from its recent downtrend line on fairly heavy volume. The 56 level served as resistance back in July of last year, and the XRT bounced off that level after recently pulling back to it, indicating support going forward.

Click to Enlarge

A fundamental trader may look at today's move and simply ask, "Why?" Given the lackluster data, one would expect these selected names to perform in line with today's price action. However, this isn't the case. Today's outperformance can be attributed simply to low expectations. Despite strong price action over the past 52 weeks, skepticism toward retail names remains high. In the table below, you'll see current option open interest on the names mentioned above. The SOIR, or Schaeffer's open interest put/call ratio, is also listed. This metric looks at open interest among the front three-months' series of options and compares that ratio to other readings seen over the past year. A reading of 100% indicates extreme pessimism, whereas a reading of 0% indicates extreme optimism. As you can see below, the bearish bets on these names has soared, and much of today's strength could be attributed to these bears capitulating on their stance.

Call/Put Open Interest

There's a valuable lesson to be learned here, in that the market isn't concerned with the actual data, but what is expected from the data. Everyone was obviously expecting bad numbers, and further upside surprises in these names could mean much more upside. Going forward, dips on these stocks should be bought until the sentiment backdrop shifts to one of broad optimism.

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