Struggles Could Persist for Signet Jewelers Stock

Signet Jewelers stock has been struggling for months, yet Wall Street has remained unusually bullish

Apr 4, 2017 at 10:13 AM
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Signet Jewelers stock has given back more than 44% year-over-year, including a 26.5% loss so far in 2017. The retail shares gapped lower in late February, and have since run into resistance at the pre-gap levels in the $70-$75 neighborhood. Adding to the trouble, heavy call open interest in the April series resides at the 70 and 75 strikes, which could reinforce resistance in this region as front-month expiration approaches. A rejection at these levels could send SIG on its next leg lower. 

sig stock news

Despite the retail stock's recent technical difficulties, short sellers have been in covering mode, with their bearish bets dropping by 40% from their mid-October record highs. Yet, this covering activity has failed to give SIG a boost on the charts. And if shorts begin to pile back on, the stock could see further pressure. A round of downgrades from the brokerage bunch could also create headwinds. At present, six of the 11 firms tracking SIG recommend buying the stock, while not one recommends selling it.

Options traders have been unusually optimistic toward SIG in recent weeks, too. Across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 6.80 not only shows long calls outpacing long puts nearly 7-to-1, but it also ranks higher than 92% of all comparable readings from the past 12 months. An unwinding of this optimism could cause trouble for SIG shares.

Right now is a prime time to purchase premium on SIG. The stock's Schaeffer's Volatility Index (SVI) of 35% -- in the low 14th percentile of its annual range -- indicates near-term options are currently well-priced, from a volatility perspective. What's more, a Schaeffer's Volatility Scorecard (SVS) of 85 suggests SIG has outperformed the volatility expectations that have been priced in over the past year. Lastly, our recommended put option has a leverage ratio of negative 4.5, meaning it will double in value on an 18.5% decline in the underlying shares.


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