MorningWord 6/10/13: Defensive Driving $XLU, $LULU

by Dan June 10, 2013 9:13 am • Commentary

MorningWord 6/10/13:  If you are in the financial punditry biz and or a active market participant (I consider myself kind of both), there is nothing like scooping Barron’s.  Late last week I laid out a theme that I think could catch some steam over the course of the next few weeks as we wind down Q2, the notion that domestically focused “defensive” sectors like Utilities that have very recently fallen out of favor after massive runs off of the Nov 2012 lows could once again gather some steam.  The idea that the U.S. seems to be the best house on a crappy block could cause investors to once again reach for yield, despite stretched valuation, and shun companies and sectors that are heavily levered to global growth, growth that hasn’t been materializing.

On Thursday I took a short term view (here) that the 10% re-tracement in the XLU could offer an opportunity at key technical support for those who agree with my view, and I even paired it up against a bearish view in the XLE which could stand to be vulnerable in the face of further weakening economic data like we saw in China over the weekend.

This past weekend, Barron’s Columnist Andrew Barry said,

“With secure 4% yields, electric utilities offer reasonable growth and defensive qualities.  The sector looks attractive after a 10% selloff since its late April highs that has been driven largely by a nearly half-percentage-point rise in Treasury yields and fear of even higher bond yields. Utilities now are up about 8% in 2013.

Just saying, maybe Barron’s is a RiskReversal fan too?

On the single stock front, LULU reports their fiscal Q1 earnings after the close and the options market is implying about a 6% move vs the ~7.5% 4 qtr avg move.  To look at the one year chart (below) it would be hard to tell the company has had their share of hiccups including earnings warnings and product recalls.  Despite trading within a few percent from its all time and 52 week highs the stock has under-performed the broad market (only up 6% ytd) and its peers NKE and UA that are both up more than 20% ytd.

LULU 1 yr chart from Bloomberg
LULU 1 yr chart from Bloomberg

In late March it looked like the earnings deceleration coupled with the product recall was gonna break the back of this phenomenal growth story.  When investor sentiment was at its worst, and Wall Street analysts started rethinking the valuation, the company did some damage control on the sheerness factor of their popular black woman’s pants and wham, the shorts started to cover (short interest sits at about 23% of the float), and thus the 33% rally that ensued.

My sense is that tonight’s report could be a fairly important one for the stock given its recent strength.  A beat and raise will likely yield a break-out from the recent consolidation which will cause shorts to climb all over each-other to cover, whereas a guide lower would cause some fast money to come out of the name as almost anyone who bought the stock in the last 6 months has gains.  We will take a closer look today and see if any trades stick out to us.