Trade Alert: Another Oversold Company Pops

Profiting from the pattern.

Presumably, these boots are not the best selling product for this luxury brand, but this is the photo their parent company chooses to put on its site.

Another Oversold Company Pops

In a post last week, we mentioned out RSI (Relative Strength Index) kept us out of a losing trade (a bearish bet against Stitch Fix SFIX 0.00%↑), and helped us time an entry into another bet (on an oversold materials stock).

Yesterday offered another example of RSI in action.

Heading into earnings on Thursday, Nike (NKE 0.00%↑) had an RSI of less than 20, indicating it was oversold.

News for the company recently hadn’t been great; as retail maven Jeff Macke noted, the company’s shoes selling for discount prices at Costco wasn’t a good look.

As it happened, the company reported mixed earnings on Thursday, beating on earnings, but missing on revenue. But since the stock was so oversold, that mixed report was enough to spike the stock nearly 8% after hours. That leads us to today’s trade, which is another oversold company, albeit one that’s a bit more upscale than Nike.

One Of A Top Trader’s Three Macro Trends

One of the top traders I follow on X (the site formerly known as Twitter) believes there are three obvious trends to watch, one of which is the persistent demand for luxury goods across the upper 3 quintiles of earners (his other two top trends are AI and the growth of GLP-1 agonist drugs like Ozempic). The company we’re betting on today is positioned to benefit from that trend. It’s down about 30% since this summer after a slight earnings miss and concerns about a recent acquisition. But it also has solid fundamentals. To put it them in perspective, let’s compare it to Nike.

Stronger Fundamentals Than Nike

Recall that the Piotroski F-Score is measure of financial strength on a scale from 0-9, with 9 being best. Nike had an F-Score of 6 heading into earnings; the stock we’re betting on today has an F-Score of 8.

Here’s what Nike’s fundamentals looked like on S&P’s histogram ahead of earnings:

Here’s what our luxury company’s fundamentals look like now:

Our bet here is that if oversold companies with weaker fundamentals have bounced on mixed earnings recently, than an oversold company with stronger fundamentals is likely to get a similar bounce. And with that kind of bounce (5% to 10%), the options trade we have for it can generate a return of more than 150%.

Details below, but before we get to that, an update on this week’s previous trade alert.

Heads Up

I updated the strikes on the previous trade in the post below. Please see that post for the details.

I don’t normally like to chase trades, but in the case of the one above, the short interest on it is 25%, so I’ve raised the strikes a bit to try to get a fill. Now on to today’s trade.

Today’s Bullish Trade