Consumer Watch

11/24/2006 12:00 am EST


Beth Gaston Moon

, Schaeffer's Investment Research, Inc.

As the holidays approach, retailers, economists, and investment advisors focus on the consumer, and his needs and wants during the holiday season. In her latest posting to subscribers, Beth Gaston Moon offers a couple of investment ideas for the season.

"The American consumer is in the spotlight, as retailers bustle about to offer the most enticing holiday specials, restaurants staff for the holiday rush, and grocers make sure to stock all of the fixings and libations necessary for the holiday gatherings scheduled from now until New Year's.

"Recently, the consumer sector gained prominence as the October Consumer Price Index (CPI) dropped by more than expected, shedding 0.5%, compared to the 0.3% decrease that was expected by economists (the core reading edged 0.1% higher).

"Falling energy prices and an improved labor market have meant good things for consumers during the past couple of months, offsetting a cooling trend in real estate. The Select Sector SPDR Consumer Discretionary Fund (XLY ASE) is among the best-performing exchange-traded funds during the past three months, rising 17% since mid-August and recently notching a new annual high. Meanwhile, the Select Sector SPDR Consumer Staples Fund (XLP AMEX) has been in a long-term uptrend since early 2003.

"One of the best-looking names in the XLY is Coach (COH NYSE). The respected manufacturer of upscale purses and accessories is branching out in its 65th year of business, venturing into jewelry and planning a fragrance line down the road. COH has cruised 65% higher since its July low, using the support of its 10-day and 20-day moving averages and recently entered new all-time high territory. Free from technical obstacles, there is no end in sight to COH's uptrend. The shares have also overtaken the 40 strike, which was poised to act as potential options-related resistance, with nearly 9,000 open positions in the January series alone.

"From our contrarian perspective, we prefer to see skepticism toward outperformers as a sign that cash remains on the sidelines. In the case of COH, the options crowd has never been more skeptical during the past year. Schaeffer's put/call open interest ratio (SOIR) for the equity, which evaluates open interest in the front three-months' series, stands at an annual high of 1.39. COH has earned a Schaeffer's Equity Scorecard rating of 8.0 (on a scale from zero to 10), suggesting continued upside. The aforementioned January 40 call could be a good in-the-money play right now and is quite fairly priced with respect to historical volatility readings. For a more conservative play, consider selling puts at the out-of-the-money January 40 or December 40 strikes. Remember that for put selling you must have a margin account."

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