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Upgrade Steers Gap to New Heights

Beth Gaston Moon (bgmoon@sir-inc.com)

9/27/2006 1:05:11 PM

Apparel retailer Gap (GPS: sentiment, chart, options) has attracted some attention today following a morning brokerage upgrade. Morgan Stanley lifted its rating on the security to "overweight" from "underweight," with the covering analyst citing better fashions and an improved clothing mix. She noted that "for the first time in over two years [Morgan Stanley] is encouraged by the retailer's apparel offering s and see signs that new merchandise and marketing initiatives are gaining traction."

On the heels of this vote of confidence, GPS has gapped up more than four percent today, reaching its highest point since August 2005. This week, the shares have scurried above their 80-week moving average, above which they have not closed in over a year.

Although the equity's price action has improved of late, its sentiment backdrop is not all that encouraging from a contrarian perspective. The options crowd is solidly in the bullish camp, as suggested by the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.39, which ranks in the 18th annual percentile. What's more, short interest fails to offer any support, as only two percent of the equity's float is sold short, amounting to a short-interest ratio of 1.7 days to cover. Currently, GPS garners a Schaeffer's Equity Scorecard rating of 5.0, suggesting equal odds of continued appreciation or a setback over the near term.

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School Daze – Part III

Beth Gaston Moon (bgmoon@sir-inc.com)

8/30/2006 4:19:37 PM

"I remember one year
My mom took me school shopping
It was me, my brother, my mom
Oh, my pop
And my little sister
All hopped in the car..."
----"Parents Just Don't Understand," DJ Jazzy Jeff & The Fresh Prince, He's the DJ, I'm the Rapper (1988)

In Monday and Tuesday's respective looks at the back-to-school theme, I covered school-supply retailers and producers of textbooks. While books and writing utensils are of the utmost importance for studying it's equally critical to look good doing it. Last week, Jocelynn Drake highlighted American Eagle Outfitters (AEOS: sentiment, chart, options) as one of the spots to stop among fashion-conscious co-eds. Today I'd like to highlight more apparel names that are most popular among adolescents. The brands listed below run the gamut from comfortable hipster threads for the pre-pubescent music fan to sleek styles for the sorority rushee.

Table of Sentiment Indicators for teen apparel retailers

Two names immediately leap off the page, thanks to Schaeffer's Equity Scorecard ratings that are near extreme levels. Charlotte Russe (CHIC: sentiment, chart, options) is set up as a potential bullish play, while Hot Topic (HOTT: sentiment, chart, options) has been downright cold.

Charlotte Russe

CHIC is a great compromise for those who want to dress like the kids from Laguna Beach but are lacking the funds. The mall-based retailer operates under the Charlotte Russe and Rampage banners in 42 states, offering the latest in trendy fashion at up to 30 percent below its competitors' prices. Revenue has grown nearly 32 percent during the past year, while quarterly earnings have surged 77 percent, according to Yahoo!Finance. When the company last reported quarterly earnings in late July, it posted a 77-percent increase in net profit, while sales rose 32 percent to $162.6 million.

Technically speaking, CHIC sure is pretty. The shares have been in rally mode since early last summer, nearly tripling in value thanks in part to long-term support from their rising 40-week moving average. In recent days, the stock has benefited from shorter-term assistance in the form of its 10-week trendline.

Weekly chart of Charlotte Russe since May 2005 with 10-week and 40-week moving averages

CHIC shares have also hugged their 10-month moving average since initially breaking out above this trendline in May 2005. The stock hurdled potential double-top resistance at the 22 level and is now trading at its highest point in more than four years.

Monthly chart of Charlotte Russe since February 2002 with 10-month moving average

Helping CHIC earn its stellar Schaeffer's Equity Scorecard reading of 8.0 is the continued backdrop of skepticism framing the shares, in spite of their strong price action. Let's begin in the options pits. In the front three-months' series combined, there are currently only about 1,000 open contracts (calls and puts), lending credence to the supposition that CHIC has not yet caught on among the speculative crowd. This is a sign that sideline money still lies in wait to help usher the equity higher.

Additionally, short interest on CHIC rose 16 percent in August, leaving nearly seven percent of the stock's float sold short and building the foundation for a modest short-covering rally, should the stock continue to press higher. The one strike against CHIC is the lack of "sell" ratings from Wall Street, reducing the likelihood of near-term brokerage upgrades. But some bullishness is typically to be expected on outperforming stocks, and this is by no means a deal-breaker. For another recent look at CHIC, I invite you to read Ryan Detrick's August 15 article, Three Bargains From the Retail Sector.

Hot Topic

If you are anything like my brother-in-law (or my colleague Joseph Hargett), with a passionate interest in metal music but a soft spot for SpongeBob Square Pants, Hot Topic might be just the store for you. According to Hoover's, the chain boasts 660 eponymous mall-based locations throughout the U.S., as well as 120 Torrid stores for plus-sized shoppers. Earlier this month, the Generation-Y retailer reported a second-quarter loss of two cents per share, matching analysts' expectations. Looking forward to the third quarter, HOTT officials expect to bank profits of 16 to 18 cents per share, despite a mid-single-digit pullback in same-store sales for the period.

A brief rebound in HOTT shares was nipped in the bud on August 1, when the company reported a surprising pullback in same-store sales for July and the second quarter. This move dropped the stock below its 10-day and 20-day moving averages, below which the shares still reside. What's more, HOTT has failed to muster any sort of rally attempt after this gap lower and has instead preferred to retreat lower during the past few weeks.

Daily chart of Hot Topic since June 2006 with 10-day and 20-day moving averages

A trend of lower lows has ushered HOTT more than 65 percent lower since its January 2004 peak. Recently, the shares breached their 80-month moving average, which went on to forge a bearish cross of the stock's 10-month trendline, signifying the risk of future downside. The shares are now plowing through territory not explored since mid-2002.

Monthly chart of Hot Topic since August 2003 with 10-month and 80-month moving averages

One of the more disturbing things about HOTT (other than the Marilyn Manson tee-shirt I spotted in there several months ago) is the utter devotion levied on it from the options crowd. Schaeffer's put/call open interest ratio (SOIR) for HOTT weighs in at 0.14. This means that in the September, October, and November series combined, there are only 14 open puts on the stock for every 100 open calls. This reading obviously skews toward an optimistic extreme and is in fact lower than 97 percent of the past year's worth of data. Should the equity continue to pull lower, some of these bullish options players could head for the exits, exacerbating the selling pressure on the shares.

Analysts are also enthusiastic toward HOTT, as all but one of the 14 brokerage firms following the retailer have named it a "hold" or better. With the equity in the territory of multi-year lows, the risk of brokerage downgrades is palpable.

One thing HOTT has going for it, from a sentiment perspective, is short interest. After a modest increase last reporting period, more than 17 percent of the stock's float is devoted to the short side, resulting in a short-interest ratio of 5.7 days to cover. This provides a fair amount of fuel to spark a short-covering rally, but is there any reason why the bears might want to abandon their positions? Perhaps in an attempt at profit taking, but as the equity's decline has been gradual in scope rather than sudden, the likelihood of a mass profit-taking campaign is reduced.

Schaeffer's Equity Scorecard currently ranks HOTT a 1.0 on a scale from zero to 10, suggesting a fairly safe bet of further declines from the shares.

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CBOE Volatility Index (.VIX) $21.90 -5.56%

9/3/2010 3:20:00 PM

The top options trades so far today are in the CBOE Volatility Index (.VIX) after the Sep - Oct 25 put spread trades at 45 cents, 58000X. The same spread traded yesterday and the action looks like rolling from one month to the next. Open interest in the Oct 25 puts increased by 54,880 to 129,900 following yesterday action and if today's block of 58K adds to it, then the increasing interest is likely to make the contract the second biggest position in the VIX; behind the Sep 25 puts, which have 289K of open interest. VIX is down 1.33 to 21.86 today and has now suffered a four-day slide of about 20 percent. The large blocks of puts on the VIX might be hedges of VIX futures.

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Sprint Nextel Corporation (S) $4.39 +1.15%

9/3/2010 2:00:02 PM

Sprint Nextel (S) shares are up a nickel to $4.39 and have now added 12.5 percent since Monday. Some players might be worried that the gains won't last, as a block of 20K Sep 4 puts recently traded at the 4-cent ask price. It might be a closing trade. Meanwhile, 8,000 Jan 4 puts also changed hands, including 4000 at the 38-cent ask and 4,000 at 37 cents. The Jan 4 puts look opening and marked "tied", so possibly a protective put or volatility play. Implied volatility in Sprint is down 4 percent to 48.5 today, compared to a 52-week high and low of 87 and 46.5.

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Urban Outfitters (URBN) $32.98 +1.23%

9/3/2010 12:00:01 PM

Urban Outfitters (URBN) adds 42 cents to $33 and options volume is 3X the average daily, led by a Sep 33 - 34 call spread, 3300X on ISE. Looks like it was sold at 45 cents and is possibly rolling up in strikes after a three-day 8.7 percent gain in the share price. URBN saw relative strength and was one of the best gainers in the NASDAQ 100 yesterday. The company is due to present at a Goldman Sachs Retailing Conference on 9/14.

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Ford Motor Company (F) $11.95 +2.04%

9/3/2010 11:00:00 AM

Ford Motor (F) adds 24 cents to $11.96, now up 5.7 percent month-to-date, after reporting an 11 percent decline in August sales on Sep 1. Options action is picking up today, with 25K calls and 9,930 puts traded on the automaker, or two times the typical volume for the first hour of trading. Early trades included blocks of Sep 14 calls at 7 cents on ISE, where sentiment data hints at opening customer buy orders. 10,775 contracts now traded.

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Microsoft Corp (MSFT) $23.90 +0.00%

9/2/2010 4:00:06 PM

Microsoft (MSFT) is flat at $23.91 and recent trades include an Oct 25 - 27 call spread at 32 cents, 5000X on CBOE. Looks like a buyer initiating the trade and the spread has been repeated multiple times. Now volume in both contracts exceeds 9000. Another noteworthy trade in Microsoft today is a block of 9555 Jan 27.5 calls at the 44-cent ask price in afternoon trading. This morning, about 30 minutes after the bell, a block of 5,720 Jan 24 calls was bought to open at $1.60 on ISE, according to ISEE data. 81,000 call options now traded on the software giant, compared to 13,000 puts. The bullish trading comes ahead of a presentation at the Citi Global Tech Conference Tuesday at Noon ET.

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Mariner Energy Inc (ME) $22.85 -2.14%

9/2/2010 1:20:02 PM

Mariner Energy (ME) shares sank in volatile morning trading on reports of an explosion on one the company's oil rigs in the Gulf of Mexico. ME sank to $19.62 and were recently down $1.04 to $22.31, and 13.7 percent off session lows. Meanwhile, options volume is running 145X the average daily, with about 23,000 puts and 3,190 calls traded. The top trade is a lot of 456 Sep 20 puts at 80 cents. It traded at 11:45 and thirty minutes after the news broke. 15.4K now traded and the contract is now bid at 40 cents. CNBC reports that no oil spilled as a result of the explosion and Dahlman Rose analysts say the explosion is likely a platform. Consequently, the fallout is likely to be consirably smaller. Still, implied volatility in the Houston-based oil driller is up sharply, almost 200 percent to 76.5.

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Momenta Pharmaceuticals Inc (MNTA) $14.78 -0.81%

9/2/2010 12:20:01 PM

Momenta Pharmaceuticals (MNTA) loses 14 cents to $14.76 and one strategist pays 25 cents for the Jan 10 - 12.5 (2X1) put ratio spread, 4000X on PHLX. Looks like a new position and might be a hedge. The Food and Drug Administration is expected to rule on Momenta's generic drug M-Enoxaparin by the end of this year. Implied volatility is flat today, but elevated at 92.

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Anadarko Petroleum Corporation (APC) $50.19 +2.87%

9/2/2010 11:00:14 AM

Bullish flow detected in Anadarko Petroleum (APC), with 23,850 calls trading, or 2x the recent avg daily call volume in the name. Shares are up $1.81 to $50.50 after The Australian published a story saying that APC is on BHP's radar screen as a possible acquisition target. 'A senior figure in the global energy industry is convinced that the "second target" for BHP is Anadarko Petroleum Corporation, telling The Australian he believed the US oil and gas independent was firmly on BHP's radar. BHP declined to comment for this article.' (Link). In options action, the focus is on APC Sep 50, 52.5 and 55 calls. Nov 55 calls are among the most actives as well.

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Burger King Holdings Inc (BKC) $18.90 +14.90%

9/1/2010 1:20:00 PM

It's been one Whopper of a day for Burker King (BKC) shareholders. The stock gapped higher, near $19 at the open, on reports the fast food chain is considering putting itself up for sale. However, the early gains faded amid talk 3I Group, the interested party, denied it was in talks with BKC. Shares dropped to $17.13 mid-morning and about 10 percent from session highs. However, the WSJ then released a story suggesting that 3G is in talks with Burger King. CNBC also out saying that it might be 3G, not 3I Group interested in BKC (very confusing -- bottom line is: original speculation about 3I Group was incorrect. It should have been 3G and yet still, it's not confirmed).\n
\nShares rallied back beyond $19 and are up $2.45 to $18.90. Meanwhile, options volume is 7X the average daily, with speculative call buying driving a lot of action in Sep and Oct 20 calls. Looks like two-way flow in Sep 19 puts and calls. Some traders are likely liquidating positions as BKC saw a flurry of activity on 8/25 and 8/26 (see 8/26 color). IV up 23 percent to 53.

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Ensco Plc (ESV) $43.95 +7.77%

9/1/2010 12:00:02 PM

Bullish flow detected in Ensco (ESV), with 5975 calls trading, or 3x the recent avg daily call volume in the name. Shares are up $3.28 to $44.06 on a good day for the oil drillers after crude rallied $2 to $73.92 a barrel. Oil Service HOLDRS (OIH) up nearly 5 percent. ESV is among the day's biggest gainers (RDC, PDE, NE, NBR, and DO also seeing relative strength). In ESV options, the focus is on Sep 43, 44, 45, and 47 calls, as well as Oct 45 and 46 calls. Overall sentiment based on the total order flow is 59 percent Bullish.

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