(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Talk about a spring rebound. Shares of Macy's Inc. (M) have climbed by about 35% since the middle of May, but signs are emerging that the national department store chain's hot streak may end soon. Options traders bet that shares of the retailer may fall by about 13% from their closing price on June 6 of $40.10. An analysis of the technical charts also suggests shares of the stock may be on thin ice, nearing a critical technical resistance level while reaching overbought levels. (See also: Macy's Soaring Stock Seen Rising 11% Higher.)
The open interest levels have been steadily rising in the puts set to expire on Aug. 17 at the $36 strike price. The current level of open put contracts stands at roughly 21,500 and has been steadily climbing since the middle of May. With the cost of the puts trading at price of about $1.15 per contract, the options are implying shares drop to $34.85 by expiration, a decline of 13% from its closing price on June 6.
Lack of Conviction
Also, there is a lack of bullish bets in Macy's open contracts on the call side beyond the $38 strike price with the number of open calls at about 1,000 contracts. The call contracts between the $39 and $47 strike price, have less than 1,000 open contracts each. The lack of bets placed would symbolize a lack of conviction for further price gains in the stock.
The technical charts also show the stock is quickly approaching a critical level of resistance at approximately $41. Should the stock fail to rise above resistance, shares could be set to fall back to a support level at $34.75, nearly in line with the options market betting. Additionally, the relative strength index is at overbought levels at almost 80, a reading above 70 indicates a stock is overbought.
Part of the recent rise may simply come down to short covering, with the short-interest levels exploding in the middle of 2017 and remaining elevated currently. The number of shares short stands at 44.3 million as of May 15, which is down from roughly 70 million on Nov. 30, a decline of 36%, while the shares of the stock have risen by 71%. But the number of shares short is still nearly four times higher than at the start of 2017 and represents about 16.4% of the float.
It would seem there is a lack of conviction among options traders that Macy's shares continue its significant gains for much longer. Meanwhile, the technical charts also suggest that Macy's stock may be running on fumes.
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 holdings. Information 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.