What do Apparel companies hold in store for us from January to March option expiration? Using historical analysis of stocks can often show seasonal patterns that can be used to understand market trends. The following article will examine if there are any significant historical trends to pay attention to in tech stocks that would be key to traders and investors while understanding how these trends can play a part in a fundamental landscape. At the end of the article, I will try to gather the information into some trades.
For our investigation, we looked at the average gain, the maximum gain vs. maximum loss, and the percentage of times different stocks have increased or decreased during the January to March option expiration time frame for the past 10 years. The equities covered for tech were Columbia Sportswear Company (COLM), G-III Apparel Group, Ltd. (GIII), Gildan Activewear Inc. (GIL), Hanesbrands Inc. (HBI), Lululemon Athletica Inc. (LULU), PVH Corp. PVH), Ralph Lauren Corporation (RL), True Religion Apparel Inc. (TRLG), Under Armour, Inc. (UA), V.F. Corporation (VFC), Warnaco Group Inc.(WRC) and Quiksilver Inc. (ZQK).
Below you can find the average gains for the past 10 years provided the company has been around for those 10 years.
From the chart above we can see that from January to March option expiration the returns of all stocks are one sided. All of the stocks shown above have posted positive average gains during this time frame, which I don't think we've ever seen before except possibly with agricultural stocks during the winter period. While GIII has not realized a negative average return it has underperformed its peers. There are a number of stocks that have over 7% average gains, ZQK, WRC, VFC and GIL. With data presented above we move on to the next important chart, the maximum gains vs. maximum losses to give us more information on how to trade the stocks.
From this chart we can see that the maximum gain for 11 of the 12 stocks presented have been larger than the maximum loss. This is an important observance since it gives possible justification why we saw so many positive average gains in the previous chart, though we'll need to see the percentage of times the stocks increased for a full conclusion. Some of these companies are historically more volatile than others. For example, ZQK and TRLG have a wide range between their max gain/ max losses during this period. On the other hand, companies such as WRC and VFC with a low max loss and a high maximum gains makes them attractive candidates to go long.
From this chart we can see that once again WRC and VFC are still out-performers during the Jan-Mar option expiration period. The problem with trading WRC is that it has already gapped up due to a buyout from PVH. When this buyout was announced on October 31, 2012, both WRC and PVH gapped up. Perhaps investors will trade PVH, which has a good average gain, attractive maximum gain vs. loss as a way to play WRC. VFC is very attractive; the company has increased in value for 10 of the past 10 years during this time frame. Interestingly, the stock looks like it's just starting to break due to its earnings report on February 15. The company saw across-the-board revenue increases in its outdoor, jeanswear, imagewear, sportswear and contemporary brands, probably due to the opening of 41 new stores in 2012. In addition VFC expects to see 2013 revenue increase 6%. With another month to go until March 15 option expiration this is a good opportunity to enter VFC before it may increase further. HBI is interesting since the stock has a great average gain and has increased in value for five of the past six years. The only worry is that the stock had a moderately size max loss, but that was in 2008 during the stock market sell-off, in every other year it have posted positive returns. As for ZQK, the stock lost its appeal that it gained in the first two charts since it only has increased 50% of the time during this period, however by no means am I bearish ZQK.
The data above must of course be combined with all the chart values presented so as not to cloud our judgment. By simultaneously looking at all three charts and analyzing overall bullish bearish sentiment I suggest the following trade.
Trade #1: Long VFC
Trade #2: Long HBI on a pull back to the 20 SMA.
Charts and fundamental data come from Finviz.com and Tradingeconomics.com
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.