Can J. Crew Group Continue Its Breakout Rally?

This skeptical write-up notes that First Lady Michelle Obama has certainly done her part to boost the shares of J. Crew Group (JCG), but warns that "the stock could easily unravel" after gaining 72% since March. The author notes that JCG "looks expensive" at its current levels, with a price-to-earnings multiple of 34.

The author's downbeat tone is echoed by a parade of analysts. One of them, Wendell Perkins of Optique Capital Management, explains, "There are positives with J. Crew, but those are trumped by the stock's recent run up, which ignores the fact that we are in the worst consumer downturn in a generation."

Contrarian Takeaway:

JCG is, in fact, flying high on the charts. The stock has been supported by its 10-day and 20-day moving averages since mid-March, but it's currently preparing to challenge its 10-month moving average -- a trendline that hasn't been toppled since April 2008. This technical roadblock could stall the stock's progress during the short term.

However, if the retailing issue can muscle past this trendline barrier, its gains could be exacerbated by a short-squeeze rally. Currently, a whopping 29% of JCG's float is sold short, which translates to roughly 8.4 days' worth of buying pressure at the stock's average daily trading volume.

While long-term value investors might want to avoid the stock at its current levels, short-term option players will want to keep an eye on that 10-month moving average. A successful challenge of this resistance level could clear the way for a continuation of JCG's breakout rally.

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Highest Option Volume for the Week Ending Monday, April 27, 2009
Ticker Symbol	Call Volume	Put Volume	Total Volume*	Put/Call Ratio
Spdrs(SPY)	359,818	664,146	1,023,964	1.85
Nasdaq 100 Index Trckng Stck(QQQQ)	214,343	337,715	552,058	1.58
Bank of America Cp(BAC)	342,909	167,214	510,123	0.49
Citigroup Inc(C)	262,025	161,828	423,853	0.62
Sel Sec Spdrs Fd Financial(XLF)	249,255	149,999	399,254	0.60
S&P 500 Index(SPX)	154,481	211,859	366,340	1.37
Microsoft(MSFT)	173,073	100,672	273,745	0.58
Wells Fargo & Co(WFC)	108,643	114,048	222,691	1.05
CBOE Market Volatility(VIX)	115,877	71,110	186,987	0.61
American Express Co(AXP)	101,823	81,848	183,671	0.80

Highest Option Volume Compare to Average Volume for Week Ending Monday, April 27, 2009
Ticker Symbol	Call Volume	Put Volume	Total Volume*	5-week Avg Volume	Volume Ratio	Put/Call Ratio
Emulex Cp (ELX)	31,821	16,052	47,873	10,303	1.98	0.50
Maxim Integrated Products Inc (MXIM)	4,479	55,022	59,501	15,318	0.08	12.28
Pepsi Bottling Group (PBG)	8,410	10,161	18,571	4,348	0.83	1.21
Penn National Gaming Inc (PENN)	13,248	4,615	17,863	4,794	2.87	0.35
Pf Changs China Bistro Inc (PFCB)	8,876	8,288	17,164	4,557	1.07	0.93
Pmc Sierra (PMCS)	10,796	2,943	13,739	3,532	3.67	0.27
Pharmaceutical Product Dev Inc (PPDI)	6,592	8,580	15,172	3,430	0.77	1.30
Robert Half International Inc (RHI)	14,226	5,754	19,980	4,505	2.47	0.40
Radioshack Cp (RSH)	9,772	20,801	30,573	7,574	0.47	2.13
Smithfield Foods Inc (SFD)	35,048	3,875	38,923	9,443	9.04	0.11

 

Retail
Bullish

Outlook: There is a growing movement within the retail sector that can be ignored no longer. While the Retail HOLDRS Trust (RTH) has bested the SPX by more than 11% during the past 60 trading days on a relative-strength basis, specialty retailers within the group have bested the broader market by more than 20% during the same time frame. Companies such as Netflix Inc. (NFLX), Family Dollar Stores, Inc. (FDO), AutoZone Inc. (AZO), Buffalo Wild Wings (BWLD), Panera Bread Company (PNRA), and Amazon.com, Inc. (AMZN) have all appealed to struggling consumers through lower-cost goods and services, as well as product innovation -- think AMZN's Kindle e-book reader. Technically speaking, NFLX and AMZN have both rallied nearly 50% so far in 2009, while FDO and AZO have soared more than 15%. By comparison, the SPX is sitting on a year-to-date loss of 4.1%. Despite this strong technical backdrop, there is a wealth of pessimism levied against these stocks. Specifically, NFLX sports a short-to-float ratio of 36%, while 10 of the 11 analysts following the shares rate them a "hold" or worse. Elsewhere, 31% of BWLD's float is sold short, while six of the 11 brokerage firms covering the stock rate it a "hold" or worse. Should this wealth of negativity start to unwind, we could see additional gains from these select names within the retail sector.

 

Financial Exchanges
Bearish

Outlook: In previous editions of Monday Morning Outlook, we have indicated that rollovers in the Financial Select Sector SPDR's (XLF) 50-day call/put buy-to-open volume ratio could have a negative impact on the sector. However, the current rollover in this ratio has had quite the opposite effect. As such, we are narrowing our bearish focus on the sector to include only financial exchanges. Specifically, Nasdaq OMX Group Inc. (NDAQ) and NYSE Euronext (NYX) look particularly vulnerable at the moment. NDAQ has plunged nearly 22% so far this year, and the shares remain pressured by their falling 10-week and 20-week moving averages. Meanwhile, NYX has plummeted more than 16% in 2009, and has closed only three weeks above its 10-week and 20-week trendlines since December 2007. As a further testament to the technical weakness in these stocks, both NYX and NDAQ saw short interest decline by 4.17% and 26.51%, respectively, during the most recent reporting period. Despite this added buying pressure, neither equity has been able to take advantage of the recent rally in the broader market.

 

Pharmaceuticals
Bearish

Outlook: While the health care sector started 2009 off on the right foot, developments in Washington, D.C., quickly brought the group to its knees. Specifically, some analysts are speculating that President Obama's budget could cut significantly into the Medicare HMO funds put in place by the Bush administration. According to those analysts, these cuts in Medicare Advantage could eliminate 10% of the money that HMOs get from the government for covering Medicare patients. As a result, the normally defensive AMEX Pharmaceutical Index (DRG) finds itself lower by more than 14.5% so far in 2009. What's more, the index continues to battle potential resistance at its falling 50-day moving average and its October 2008 lows. Meanwhile, sentiment toward the health care sector remains heavily bullish. Specifically, 52.93% of the 427 analyst ratings on health care stocks are "buys," compared to only 6.79% "sells," according to Zacks. Any downgrades for this group could have a negative impact on the pharmaceutical sector.