The Volatility Trader
105 W. Monument Street
Baltimore, MD 21201
Monday, August 28, 2006
Email – #174
Action to Take:
Buy the November 2006 $25 puts (LTD-WE) at $1.45 or less. If the option falls below $1, close the trade. If any news surfaces, I will immediately let you know. Investors who prefer to trade stock can short LTD at current levels, with a stop at $27.25.
Amid surging gasoline prices, the retail sector is one that’s struggling to cope.
It’s as simple as this: For every additional dollar people pay at the pump, that’s one dollar less that they’ll spend at a retail store. While clothing is important to many in our society, it’s a non-essential item, and therefore not something you HAVE to shop for every week.
And the cracks are starting to show. Take a look at the S&P Retail Index below and you’ll see that it’s trading near a 52-week low, just above support levels seen in 2005.
If broader sector weakness wasn’t already enough, Goldman Sachs pummeled Chico’s (NYSE: CHS) last Thursday with a downgrade from buy to neutral. The analyst blow was based on increased margin pressure. Consequently, Goldman cut full-year earnings estimates to $1.13.
If the old market adage, “the trend is your friend” has any merit to it, then we will certainly be on the right side of this trade. How? Because the chances are good that other companies within the retail sector are feeling the same pressure. And it’s here where our trade comes in.
Limited Brands (NYSE: LTD) is another company that’s also lost ground on lowered guidance and a downgrade by Prudential. But that’s not the end of the damage.
In fact, as Wall Street begins to take notice of the company’s challenging year, more downgrades could come before we know it. And, given that much of the sector is trading at 52-week lows, there’s not much holding Limited Brands up at this point – as the following chart shows…
Exit is everything,
Mark Whistler
