The doors are back open at Kohl’s (NYSE:KSS), well kind of. After having its share of issues off and on the price chart, the only investors Kohl’s stock should be welcoming back in are bearish shorts. Let me explain.
The market seemingly won’t go down. More than three months after its historical market crash at the hands of the novel coronavirus, risk assets led by the Nasdaq Composite have made a comeback in a very big way.
For its part, the tech heavy bellwether is up more over 50% at record breaking all-time-highs. And leaders Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) are providing even sweeter returns for their investors.
It’s hard to believe, right? But Wall Street’s turn for the better also stresses appreciating the resilience and ingenuity of many American businesses. And of course, let’s not forget the Federal Reserve. There is that long-standing belief it’s not wise for investors to fight regulators with fistfuls of printed money.
Still, don’t make the mistake of believing an underwhelming Kohl’s stock is due for better days despite the recent help and yesterday’s buying spree.
In Wednesday’s session, shares of Kohl’s rallied nearly 9.50% to finish at $22.22 following a Bank of America upgrade to buy and an above-market price target of $27. Behind the positive recommendation analysts are optimistic on the department store’s prospects given its off-mall format and significant Midwest presence.
So, what? BofA points to Macy’s (NYSE:M) recent quarterly results and where the retailer’s own pockets of strength have resided since re-opening amid the coronavirus. Analysts also noted Kohl’s relatively healthy balance sheet, online sales throughout Covid-19 and the opportunity to grab market share from JCPenney’s (OTCMKTS:JCPNQ) brick-and-mortar store closures.
Kohl’s Stock Weekly Price Chart
I suppose if misery loves company, bulls can shop Kohl’s, Macy’s and a barely breathing OTC-listed JCPenney together. But don’t expect much. Rather, investors should be prepared for larger and more meaningful downside risk versus the possibility for shorter-lived rallies.
Despite BofA’s enthusiastic rationale for owning Kohl’s stock, shares remain a technical mess and are in position for shorting. Currently the damaged goods have taken on the shape of a flag pattern set beneath former long-term up-channel.
As the weekly chart of Kohl’s demonstrates, shares are on the cusp of breaking pattern support after establishing a pivot high for the bearish formation in June. What’s more, on the monthly chart, June’s candlestick takes on the look of an ominous shooting star top.
With weekly stochastics having bearishly crossed out of an overbought reading following a dazzling and broad-based Covid-19 rally, it’s time for yesterday’s bulls to already consider returning their stock merchandise. And with Kohl’s stock giving back more than half of yesterday’s gains, the warning is solidified. That’s regardless of whether investors are pointing fingers at Bed Bath & Beyond’s (NASDAQ:BBBY) disappointing earnings as the culprit.
For investors who are agreeable with this bearish outlook, comfortable with shorting but also want a safer way to position than what’s possible with shorting a stock, a debit put spread might be a better alternative.
This type of bearish vertical offers defined and reduced risk while offering leveraged returns if a stock falters as planned. After a quick review of what’s possible with Kohl’s options and with shares changing hands at $21.05, one favored position of this kind is the Oct $17.50 / $12.50 put spread for $1.40.
The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.