Give Thanks For Jean Shorts. (KTB)

Today’s trade is based on textile manufacturer, Kontoor Brands (NYSE:KTB), makers of Lee and Wrangler denim apparel.

We like the product.

But even dungarees have their limits, no?

So what’s the problem?

For starters, it’s jeans we’re talking about here, and they have nothing to do with the Batflu.

Right?

So there’s very little reason for the incredibly steep rise in price we’ve seen over the last two months.

Right?

That is, it’s not ZOOM.

Or Facebook.

In fact, as you’ll see on the chart below, the move from $13 TO $45 in half a year – while sales and earnings were dumping – makes little sense at all…

Particularly today, when…

• P/E is a foolish 54.3,
• Price to Book is an overdone 95.61,
• Debt to Equity ratio is 39.9, and
• Sales and earnings numbers, as mentioned, are all down for the last year and five year periods.

Torn and Frayed

Take a look now at the daily chart –

Technically, she lines up like this…

1. Most damning of all is the pair of overbought RSI reads that occurred over the last 30 days (in green) – a sure sign that a top is in play,
2. Add to that, the 100% rise in price over the last 60 days (in red), a ramp upward that had no relation whatsoever to the company’s real-life financial underpinnings, and
3. That occurred without any concomitant expansion in volume (in black)…and you have the makings of an entirely fake rally, what the Romans called “placebo parabolica”!
4. 
5. Moving right along, price is now situated at the top end of the current trend channel (in red) – and is therefore likely to retrace, and
6. We never got a retest of the old resistance (now support) at 28 (in blue).

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All told, the daily chart is a short-sellers dream, but it’s worthwhile looking at the weekly, too, where you’ll see an even more thunderous alarm – an overbought weekly RSI reading (below, in green).

Pay attention, too, to the striking tailing action on the volume chart (in black), which indicates very little commitment behind the last four weeks’ buying.

See here –

Come to think of it, we wouldn’t even take these guys to the change room.

Sell that sucker!

We’re playing it with a long PUT spread, paid for with a short CALL spread.

Like this –

A Jew and His Gold recommends you consider the sale of the KTB January 15^th 40/45 CALL spread for $2.15 (4.80/2.65), and using those funds to purchase the KTB January 45/35 PUT spread for $3.95 (4.60/0.65).  Total debit on the trade is $1.80.

Rationale:

We want a piece of the KTB decline, but we don’t want to pay for it.

The sale of the CALL spread offers us a large chunk of cash toward that end.

Maximum gain on the trade is $8.20 (difference between long PUT strikes less the initial debit).

Maximum loss is $6.80 (difference between short CALL strikes plus the initial debit).

Because the spreads are overlapping, gains and losses between 40 and 45 are muted.

Breakeven arrives at $40.70 [current price is $43.40].

Many happy returns!

Matt McAbby

P.S. come back tomorrow for news on IBP, CROX and EXPE.

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