It's been a rough start to the month for American Eagle Outfitters (NYSE:AEO), which tagged a two-year bottom of $13.66 on Sept. 4. Today, AEO is up 3% to trade at $16.32, but this could spell more trouble for the retailer later in September, if history is any guide.
Today's rally takes the shares right up to resistance at their 60-day moving average, after a lengthy stretch below it. There have been four similar encounters with this moving average in the last three years, after which AEO stock was lower 10 days later by 8.3%, on average, per data from Schaeffer's Senior Quantitative Analyst Rocky White, with three of the four returns negative.
What's more, implied volatilities on the equity are at low levels. The equity's Schaeffer's Volatility Index (SVI) of 42% registers in the 17th percentile of its annual range, a few notches below its two-year average SVI of 44.4%. With the stock resting on a historically bearish trendline, and short-term options unusually cheap at the moment, White's modeling shows that an at-the-money AEO put option could potentially return 141% over two weeks. In other words, prospective put buyers could more than quadruple their money on an expected 8.3% drop in the shares.
For a stock that's down 33% year-over-year, there's plenty of optimism to be unwound that could also fuel a decline. For starters, there's potential for downgrades, as six of the 11 brokerages in coverage rate the stock a "strong buy" and the consensus 12-month price target sits up at $19.27, territory not seen since June.
Calls are also heavily preferred. The security's Schaeffer's put/call open interest ratio (SOIR) of 0.48 ranks in the bottom 3rd percentile -- show a very unusual call-skew among short-term speculators. Another decline this month could lead to an unwinding of bullish bets.