Macy's May Fall 18% as Option Traders Turn Bears

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Macy's Inc. (M) shares have jumped by roughly 21% as investors begin to grow more optimistic that the department store can continue to turn the corner and revive its slumping sales. But options traders are betting the stock's rise may be ready to take a turn lower, perhaps by as much as 18%. Meanwhile, a technical analysis of the charts are also signaling shares may be overbought at current levels, and could decline into the mid-20s.

Analysts are forecasting Macy's earnings to decline by nearly 6% in fiscal 2019, but that outlook has improved substantially over the past few weeks. On January 5, analysts had been estimating the company would earn $2.84, but since that time estimates have climbed by nearly 25% to $3.54. The improving sentiment among analysts and investors is the reason behind the sharp rise in this year. (For more, see also: Macy's Stock Could Reward Bottom Fishers.)

Bearish Bets

Options traders are betting the recent run-up in the stock is likely to wane, using the options that expire on May 18. The long straddle options strategy suggest shares could rise or fall by roughly 17 from the $30 strike price, putting the stock in a trading range of $24.90 to $35.10. It cost approximately $5.10 to buy one put and one call. But the number of puts heavily outweighs the number of calls, by a ratio of nearly 6 to 1, with almost 27,000 contracts of open interest, giving the put contracts a notional value of roughly $6.6 million—a sizeable sum. It would imply the stock could fall by over 18% from its current price of approximately $30.50

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Technical Gaps

The technical chart also suggests shares of Macy's could decline over the coming weeks. The stock has now filled a gap created in May of 2017, suggesting shares could continue its downward trend.  Additionally, another small gap was formed just at the end of February, and should that gap be filed the stock would fall to technical support around $27.50 and could foretell a further decline towards the mid-20s. 

Overbought Shares

The chart also points out that the relative strength index is above 70, and that would indicate the stock is overbought at current levels. It too serves as another bearish indicator for the stock over the coming weeks. (For related reading, see also: Macy's Holiday Sales Update Leaves Investors Cold.)

The real test will come over the next several weeks. If analysts continue to up their view on the company and the outlook improves, perhaps that could help push shares higher. If not, then Macy's could be set for a pullback based on the options that expire in May and the technical chart. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance. 

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