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This morning, I am recommending a bearish trade on Dine Brands Global, Inc. (NYSE:DIN), owner of the Applebee’s and IHOP franchises.
With the S&P 500 index giving up more than 60 points over just the past two days, my indicators are giving strong sell signals this week.
The selloff follows the Federal Open Market Committee (FOMC)’s decision to cut the federal funds rate by 0.25% on Wednesday. While that should be a positive for the market in the intermediate- to longer-term, the cut was already priced into the market well in advance of the meeting.
The market was “priced for perfection” before the selloff this week, and the path of least resistance was be to the downside. Last week, I mentioned that the low level of trading volume in the technology sector was forecasting a drop in the market, so it wasn’t that much of a surprise to see traders sell following the Fed announcement.
I think a bearish put option would be a good strategy in this environment, and DIN has international exposure, which could work to our advantage because of the rising dollar.
The U.S. is Still the Best Place to Invest
Now, just because the market has fallen a bit this week doesn’t mean that all is lost. In fact, the U.S. economy is performing quite well. Earnings figures released this season have been decent, GDP rose at a 2.3% year-over-year rate in the second quarter and while the pace of growth in the manufacturing sector declined in July, manufacturing still expanded overall.
We also saw a larger-than-expected decline in crude oil inventories this week, which tells me that the economy is not as bad as some say it is.
A booming economy is good, but it’s also keeping the U.S. dollar strong. Meanwhile, currencies around the world are declining. Europe, for example, is doing what it can to lower the value of its currency to make its economy more competitive.
This can be bad for big, multinational companies like DIN because it cuts into their profits. If a company does business where the currency is worth significantly less than the U.S. dollar, its profits suffer because of the conversion. As the value of the dollar goes up, the value of foreign profits goes down.
And DIN missed both earnings and revenue expectations this week. If the U.S. continues to outpace the global economy, the stock could continue to suffer.
Resistance in the $82-$85 Range
DIN opened much lower after reporting its earnings miss on July 31, but it did close the day higher. The stock pushed higher again yesterday, and it closed just above $84. The $82-$85 range served as support from late March to late May, but now it could become a new resistance level. If DIN fails to push above that range, it may retest its recent low.
Daily Chart of Dine Brands Global, Inc. (DIN) — Chart Source: TradingView
The stock opened at $78 after its earnings report, and its next support level after that is in the $74-$76 range. I think the stock could head back down to that range if it fails to establish support at $78. For that reason, the $75 level makes a good target for a bearish put.
Buy to open the Dine Brands Global, Inc. (DIN) Sept. 20th $75 Puts (DIN190920P00075000) at $1.65 or lower.
InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.
