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This morning, I am recommending a bearish trade on The Buckle, Inc. (NYSE:BKE), the casual apparel retailer.
My indicators are flashing sell signals again this week as the S&P falls to support at the 2,800 level. Market breadth, or the ratio of advancing stocks to declining stocks, is deteriorating, meaning that more stocks are falling than rising. That’s a negative sign, so I’m staying in the bearish camp this week.
The biggest story on the market is the breakdown in trade negotiations between the U.S. and China. That impasse sent the market down by about 3% this week.
The U.S. economy and the U.S. dollar continue to show strength because this trade war hasn’t really trickled down to the U.S. consumer just yet. Some segments of the U.S. market, particularly the technology stocks, are getting hit harder than others.
But that doesn’t mean that other sectors are immune to slowing down as the trade war drags on. I don’t think the market has fully priced in a full-blown trade war, and the retail sector is particularly vulnerable to trade issues.
BKE is a Particularly Vulnerable Retailer
We are moving further into a bad trade situation, and it is already starting to drag on the retail sector. If we look at the SPDR S&P Retail ETF (NYSEARCA:XRT), we can see that the sector started struggling the week after higher tariffs on Chinese imports went into effect.
Daily Chart of SPDR S&P Retail ETF (XRT) — Chart Source: TradingView
But what makes BKE more vulnerable than other retail stocks? To answer that, we need to look at its earnings report from this morning.
BKE Missed Earnings
According to Zacks, BKE missed earnings per share (EPS) estimates, coming in at $0.31 EPS rather than the expected $0.36. Earnings are about past performance, but they also give investors an idea about how a stock will fare in a given market environment.
If BKE is missing estimates for the first quarter of 2019, when things were more favorable, why would it perform better with these new trade issues?
Daily Chart of Buckle, Inc. (BKE) — Chart Source: TradingView
If we look at the daily chart of BKE, we see it doesn’t have much recent support below the $17 level. In fact, the next support level BKE has is from October 2018.
That support is around $15, and now that the stock has broken below its more recent support, it will likely move to retest those levels. That’s why I’m recommending a put with a strike set at $15 this morning.
Buy to open the Buckle, Inc. (BKE) July 19th $15 Puts (BKE190719P00015000) at $0.70 or lower.
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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.
