Easily one of the standout winners on Wall Street during the midweek session was retailing giant Macy's Inc. (NYSE:M). After struggling for traction and relevance amid a seismic paradigm shift in the discretionary consumer economy, the iconic department store has finally demonstrated signs of life. By delivering an unexpectedly stout financial performance, M stock looks intriguing in the near term. However, skepticism may ultimately win out.
On paper, circumstances look encouraging. For the second quarter, Macy's generated revenue of $4.81 billion, beating out analysts' consensus target of $4.76 billion. On the bottom line, the retailer posted adjusted earnings of 41 cents per share, storming past the consensus view of 18 cents. Subsequently, M stock jumped 18%.
Other details justified optimism in Macy's, including comparable sales rising 0.8% on an owned basis and popping up 1.9% on a comparable owned-plus-licensed-plus-marketplace (O+L+M) basis. These stats exceeded the company's guidance, implying resurgent performance. Also, individual brands enjoyed an uptrend, with Bloomingdale's in particular seeing its O+L+M basis sales rise 5.7%.
Finally, management raised its 2025 earnings guidance from $1.60 to $2.00 to a range between $1.70 and $2.05. In contrast, analysts were looking for earnings of $1.79 per share. Also, the company lifted its sales guidance to $21.15 billion and $21.45 billion (compared to the prior $21.4 billion to $21.15 billion).
With so much strong data, where's the skepticism?
Broadly speaking, the latest sales tally still represents a 2.63% decline from the prior-year quarter's result. But arguably the most problematic issue is the gross margin rate contracting 80 basis points to 39.7% due to markdowns and tariff-affected products. Ordinarily, this erosion would be expected. However, management has pivoted toward higher-end consumers.
It's not an unreasonable assumption that even the more affluent consumers are hurting from wider economic pressures. If so, M stock could be susceptible to a correction.
Market Currents Risk Sending M Stock Lower
On the surface, M stock doesn't appear particularly remarkable — with the obvious exception of today's massive move higher. But even with the skyrocketing, the net result from a market breadth perspective is rather mundane. In the trailing 10 weeks, there have been six up weeks, four down weeks, with an overall upward trajectory. For classification, this sequence can be called 6-4-U.
Between January 2019 through a little past the halfway point this year, the 6-4-U sequence has flashed 43 times on a rolling basis. Of this figure, whether M stock moves higher or lower in the following week is about 50/50. There's really no point in trading Macy's stock on the basis of this sequence alone.
However, at the end of the 10-week period, the security is up relative to the anchor point 26 times (or 60.46%). While this statistic sounds enticing, the overall drift is negative, with the 6-4-U signal implying a median high of $15.98 but a median low of $13.45.
In other words, while M stock may happen to be up on an absolute basis relative to the anchor point 10 weeks out, as a broader trend, the trajectory skews negative.
To be fair, the implications from the 6-4-U sequence represent an in-sample argument; essentially, both the conclusion and the evidence to support the conclusion hail from the same source. To get a better confidence interval, we must conduct an out-of-sample test.
I've performed three: one post-Great Recession, one pre-COVID-19 crisis and one post-COVID:
Bottom line, only the pre-COVID out-of-sample test showed that the 6-4-U sequence carries a slightly positive skew. In the other tests (as well as the in-sample dataset), the sequence typically signals a negative skew.
Therefore, based on the actual scientific evidence of market psychology — rather than the hand-waving and arbitrarily drawn squiggly lines so common in technical "analysis" — M stock appears to be more of a bearish opportunity than a bullish one.
Two Monthly Bear Put Spreads to Consider
Leveraging the market intelligence above, intrepid speculators may consider a multi-leg options strategy known as the bear put spread. This transactional geometry involves buying a put option and simultaneously selling a put at a lower strike price. The proceeds received from the sale of the put (i.e. the short put) offset the gross debit paid for the long put, thus providing a discounted net bearish position.
The idea behind the bear put spread is for the underlying security to fall through the short (lower) strike price at expiration. If so, the trader collects a maximum (capped) payout. Risk is also capped at the net debit paid, making it an attractive idea for a wide range of speculators.
First, traders may consider the 16/15 bear put spread expiring Oct. 17. This transaction requires a net debit paid of $53, with the chance to earn a profit of $47 if M stock falls through the short strike price ($15) at expiration, translating to a payout of almost 89%.
Second, the more aggressive trade is the 15/14 bear spread expiring Nov. 21. This transaction requires a net debit of $40, with the chance to earn a profit of $60, a 150% payout. While it's an ambitious trade, past analogs suggest that it's very much in play.
The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.
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