Home goods retailer Bed Bath & Beyond (BBBY) has been a long-time laggard on the charts. From its highs around the $80 level, set just over four years ago, the stock has shed about 80% of its value to trade at $15.60. However, on the heels of a nearly 38% year-to-date rally that has pushed BBBY’s 14-day Relative Strength Index (RSI) up to 69 — right on the doorstep of overbought territory — it looks like an opportune time to bet on a fresh leg lower for the retail stock.
Reinforcing this view is BBBY’s encroachment on its 160-day moving average, which has been a source of reliable sell signals in recent years. According to Schaeffer’s Senior Quantitative Analyst Rocky White, there have been eight occasions over the past three years where BBBY has risen to within one standard deviation of its 160-day moving average after a prolonged stretch of trading beneath it — with the latest such signal occurring at Tuesday’s close. And after those prior occurrences, the short-term returns for BBBY shares have been generally negative.
Looking at the average five-day returns after a test of resistance at the stock’s 160-day moving average, BBBY tends to drop 2.93%, with only 13% of the returns positive. Widening the lens to look at average 21-day returns, BBBY is down 7.78% post-signal, with 25% positive returns. A similar pullback this time around would put the equity at $14.30 one month from now.
BBBY has already been heavily targeted by short sellers — not surprising, given its lengthy track record of underperformance — with no less than 27.7% of its float sold short. This does create some risk to a bearish trade on the stock right now, as there’s the potential for a quick pop higher in the event of any good news.
That said, a theoretical short squeeze would take fewer than 2.5 trading days to play out, at the equity’s average daily trading volume. And despite short interest hovering around multi-year highs, these bears currently show no signs of backing down; the number of BBBY shares sold short ramped up by 13.6% in the most recent reporting period.
Plus, there’s no event-related risk on the horizon over the time frame it would take this 160-day sell signal to play out. The retailer just reported earnings in early January, so another quarterly report isn’t expected until April 10.
Meanwhile, BBBY options are cheap, according to data from Trade-Alert. The stock’s 30-day at-the-money implied volatility stands at 40.1%, which registers in just the 33rd percentile of its annual range. In other words, it’s an opportune time for speculative players to buy puts in anticipation of another leg lower, given that option prices are carrying a relatively low volatility premium.