Mind the Gap's Gap

09/16/2009 11:30 am EST

Focus: STOCKS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says the stock of the retailer has come a long way, but it faces very strong resistance to moving higher.

Gap (NYSE: GPS) is back in a big way. According to [a recent] BusinessWeek article [in Gene Marcial’s Inside Wall Street column], "not only is the apparel giant spending big to push new products at its Gap and Old Navy stores, but it's also keeping a lid on other expenses to fatten margins."

The plan seems to be working, as the company’s second-quarter earnings report topped analyst expectations. Furthermore, shares have leapt more than 129% in just ten months.”

Analysts heartily agree: "The Gap is finally moving from defense to offense in driving up sales," says Edward Yruma of KeyBanc Capital Markets. Yruma upgraded GPS to Buy from Hold" [recently]. Meanwhile, Lorraine Hutchinson of Bank of America Merrill Lynch also rates GPS a Buy, stating that the company "…has taken the right steps in a difficult environment.”

GPS has performed quite admirably during the past several months. Fundamentally, on August 20th, the firm beat Wall Street's second-quarter earnings forecast by a penny per share. But the move may have been due more to cost cutting than improved sales, as revenue fell 7.3% on a year-over-year basis. Furthermore, same-store sales fell 8% during the second quarter.

Traders shrugged off the sales figures, and GPS has continued higher along support at its ten- and 20-day moving averages. The problem is that the shares are now facing staunch long-term resistance in the $22 area. GPS has not closed a session above this region since March 14, 2005. GPS is pulling back from the $22 level after coming as close as $21.77 on September 8th. (It closed around $21.50 Tuesday—Editor.)

On the sentiment front, investors remain heavily bullish. Specifically, GPS's Schaeffer's put/call open interest ratio (SOIR) of 0.82 ranks below 72% of those taken in the past year, while the stock's ten-day International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) call/put volume ratio of 2.02 reveals that calls bought to open have more than doubled puts purchased during the prior two weeks.

Analysts are also piling on the praise. In fact, ten of the 16 brokerage firms following GPS rate the security a Buy or better, with nary a Sell to be found.

However, the number of GPS shares sold short spiked by more than 11% during the most recent reporting period. Given that call buying has seen a spike in tandem with rising short interest, these seemingly bullish options players may merely be hedging their short positions.

GPS finds itself once again challenging a ceiling that it has rarely bested during the past several years. If the shares are rejected in this region, we could see bullish investors jump ship, thus increasing selling pressure. And even if the shares do continue higher, the pace should be considerably clipped, given that nearly everyone has already bought into the rally.

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