New Trade JCP – Sentiment Way Too Bearish, Taking the Other Side

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Everyone’s jumped on the bash-JCP train over the past week.  Is JC Penney a broken story?  Yes.  Is it distressingly burning cash as it tries to turn around sales?  Yes.  Is CEO Ron Johnson running out of time before he’s fired?  Yes.  Even though it trades at book value, is its book value potentially overstated based on poor store locations?  Yes.  Does everyone already know all this?  Yes.

When I was on CNBC’s Halftime Report yesterday, the other traders were engaged in passionate attacks against JCP stock.  But JCP stock is down 50% from its mid-September highs.  50% drop in 2 months!  Surely, much of the bad news that each news outlet is trotting out has been digested by the market.  In fact, traders should always remember that for each buyer, there is a seller, and vice versa.  Meaning, there are people out there who must think JCP is a buy at current price levels, or it wouldn’t trade at current price levels.  I am finally one of those people.

Here’s an updated 5 year chart of JCP after the recent break of $19 support:



Clearly, the break of $19 was important.  My guess is the $19-20 area should serve as resistance on a bounce.  But with the stock so oversold (RSI of 18), and sentiment was negative, I think JCP very close to done going down.  I just think anyone who wanted to sell the stock has already sold.

One HUGE caveat here before I disclose my trade:  I think JCP offers a great trading opportunity through the options, but I have no bullish view on JCP’s long-term prospects, and wouldn’t buy the stock given the risks of catching a falling knife.  But sentiment is so washed out, I’m going to play for an improvement in sentiment with a nuanced trade structure.