2 Oversold Retailers Looking for a Holiday Bounce

Macy's Inc (M) and Nordstrom, Inc. (JWN) could both capitalize on unwinding negativity on Wall Street

Dec 23, 2016 at 3:16 PM
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As the week before Christmas wraps up and customers run out to finish their last-minute holiday shopping, brick-and-mortar retailers are looking to profit from the rush of consumers who don't have time to make their purchases online. Among the stocks standing to benefit from the eleventh-hour scramble are department stores Macy's Inc (NYSE:M) and Nordstrom, Inc. (NYSE:JWN). Moreover, both M and JWN appear poised to run higher on the charts after their shares hit oversold territory.

M has underperformed the broader market in 2016, up just 4.1% year-to-date. That said, the stock has been coming on strong since tapping a five-year low in May, and has found support above a trendline connecting a series of higher lows since then. The shares are up 0.7% at $36.42 today, and it looks like a bounce may have been due, given last night's 14-day Relative Strength Index (RSI) of 30 -- on the edge of oversold territory, after being overbought a month ago.

While the equity has been trekking steadily higher for months, analysts have remained lukewarm toward M, with 10 out of 13 brokerage firms maintaining "hold" recommendations. Meanwhile, short sellers have continued to pile on. These bearish bets climbed by roughly 26% during the most recent two-week reporting period.

Pessimism has been running high in the options arena, as well. Specifically, M holds a 10-week put/call volume ratio of 0.86 across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- just 4 percentage points from an annual high. An unwinding of bearish positions in and out of the options pits could help send Macy's Inc (NYSE:M) on another leg higher. The firm will also be depending on healthy holiday sales to bolster its stock, as CNBC called out M as one of the 12 companies most reliant on the holiday quarter.

Meanwhile, JWN has added 1% at $48.70, but is still sitting in the red on a year-to-date basis. The shares have been falling hard since topping out just south of $62 earlier this month -- bringing their 14-day RSI to 30 at Thursday's close -- and are testing support at the 200-day moving average. Touching this trendline could prove to be a bullish indicator for JWN , according to data compiled by Schaeffer's Senior Quantitative Analyst Rocky White. Four pullbacks to this moving average have occurred over the past three years, and every one of these has resulted in a positive return after five days, with an average gain of 5.9%.

There's also plenty of pessimism left to unwind, which could create tailwinds for JWN. Of 20 analysts tracking the stock, 60% rate it a "hold" or worse, leaving room for upgrades. And short interest has been dropping since hitting a record high in August, but these bearish positions still represent more than 21% of JWN's available float. At the equity's average daily volume, it would take nearly eight sessions to buy back all the shorted shares -- plenty of purchasing power to boost the stock.

Options traders have shown a preference for call buying lately, per JWN's 50-day call/put volume ratio of 1.44 at the ISE, CBOE, and PHLX -- near the top quartile of its annual range. But it's possible many recent call buyers were in fact short sellers looking for a hedge against an upside surprises. Shifting gears slightly, Nordstrom, Inc. (NYSE:JWN) holds a front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 2.60 -- indicating puts nearly triple calls among near-the-money options in the January series. So, despite the recent call buying, short-term open interest remains heavily put-skewed.

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