Update 5/6/2013: MW broke above it's above its 10-day price channel, $33.67, signalling that I should exit my bear position for a 3.1% loss from the entry price.
I haven't closed the position yet for strategic reasons; the position is constructed of vertical credit spreads expiring May 18, and I want to give the price time to pull down a bit in response to Friday's 2.5% rise.
The price rise on Friday set a new upper boundary for the 10-day channel, $34.11, and I have adopted that as a new stop/loss while I see what happens. A closing price above that level will prompt me to exit the position. Otherwise, I intend to hold on to it and see what happens.
The Men's Wearhouse Inc. (MW) fell below its 20-day price channel on Thursday, confirming the bull signal the next day by continuing to trade below the lower channel boundary, $32.64.
The breakout to the downside comes within a symmetrical triangle pattern: A series of lower highs and higher low that have been constricting the extremes of MW trading since early March 2012.
In trading lore a symmetrical triangle is agnostic as to direction but at the apex it is anticipated that the price will make a large move equal to the width of the base. The base for this formation runs from $40.97 in early March 2012 to $25.97 four months later, for base that is $15 wide.
The present trendlines point to an apex at about $31.50 reached in early 2014, and from that point, the lore goes, the price will either run up to $46.50 or down to $16.50.
Maybe so. Maybe not. The key point for us as short-term traders is the timing of the apex. It suggests that for the next nine months, MW will have a narrowing range of trade that in turn will increasingly restrict potential profits.
It may be in a bear trend, but it is a bear in a bottle.
But restrict by how much? The lower boundary of the triangle today stands at about $27.75. That gives 15% of profit from the present price if that level is indeed the bounce point.
MW has broken out to the downside five times since the triangle pattern began in March 2012. Three of the four completed trades produced a profit, averaging 9.1% apiece. The one unsuccessful trade lost 4.5%.
The 75% success rate applied to the yield on winning trades produces a 6.8% score, well above my preferred 5% minimum. The spread between the winning and losing yields is 4.6%, which adds to the edge for bearish trades.
Since the post-recession recovery began in the broad markets, MW has completed 17 bear breakouts. The six winners on average yielded 9.4%, and the 11 losers took an 11.8% hit. The success rate is only 35.3% and the spread between winning and losing yields is negative. So over the long term a bet against MW has been a way to lose money.
The near term and longer terms odds show that MW has undergone a trend change. For more than a year betting on a stock decline has been increasingly the more profitable trade.
Men's Wearhouse, headquartered in Houston, Texas, is a familiar fixture of the American retail landscape. It sells suits for men from 1,049 stores in the U.S. and 117 in Canada, and also rents tuxedos. The business model seeks to distinguish their stores from the competition by making it easy to put together a decent look formal wardrobe at a reasonable price.
The handful of analysts following the company are mainly bullish on its prospects, collectively producing a 60% enthusiasm rating.
Men's Wearhouse reports return on equity of 12% -- respectable but not particularly impressive -- and no long-term debt -- very impressive.
The company has had three losing quarters out of the last 12, and it has always been the 4th quarter, the season when most retailers are making a bundle. The peak for Men's Wearhouse comes in the 2nd quarter -- spring -- when a young man's fancy turns to, obviously, to clothing, and each 2nd quarter has bettered the one year ago in 2012 and 2013.
Earnings have surprised to the upside nine out of the last 12 quarters, and to the downside in three quarters.
Institutional ownership is high, at 93% of shares, and the price is quite low: It takes 66 cents in shares to control a dollar in sales.
MW on average trades 599,000 shares a day and supports a wide selection of option strike prices with open interest mainly running to three figures. The front-month at-the-money bid/ask spread on puts is 8.3%.
Implied volatility stands at 27%, near the bottom of the six-month range. It has been rising gently since April 15.
Options are pricing in confidence that 68.2% of trades will fall between $30.03 and $35.05 over the next month, for a potential gain or loss of 7.7%, and between $31.33 and $33.75 over the next week.
Today's trading in options is quite active to the upside, with call volume running at nearly triple its five-day average. Puts are running at 92% of average.
With 160 minutes remaining before the closing bell, the fair-price zone runs from $32.25 to $32.70, encompassing 68.2% of transactions surrounding the most-traded price, $32.46.
Men's Wearhouse next publishes earnings on June 3. The stock goes ex-dividend on June 14 for a quarterly payout yielding 2.22% annualized at today's prices.
Decision for my account: I've opened a bear position in MW, structuring it as a vertical credit spread expiring May 18, short the $33 call and long the $35 call.
I like the options selection, the odds and the financials. Also, the 15% potential yield down to the lower triangle boundary is quite convincing.
The position has a potential maximum yield of 39.9%. The vertical is profitable at expiration up to $33.57, providing a 2.9% cushion.
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.