Signet Jewelers Is No Diamond in the Rough

The shares of Signet Jewelers (SIG) gapped lower on Jan. 17, after the company cut its same-store sales forecast after reporting weak holiday sales. Since then, SIG has been consolidating around the $25 level — and touched a nine-year low of $23.61 on Feb. 4 — but a technical signal suggests the next leg lower could be just around the corner.

Specifically, SIG’s 20-day moving average has descended into the region. The stock is now within one standard deviation of this trendline, after a lengthy stretch above it. Over the past two years, there have been four of these signals for the equity, according to Schaeffer’s Senior Quantitative Analyst Rocky White. Afterwards, SIG was down nearly 14%, on average, one month later, and lower 75% of the time. From the stock’s current perch at $25.23, a similar drop would have SIG around $21.70 — territory not charted since mid-2009.

Despite SIG’s troubles on and off the charts, options traders have been betting on a rebound. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock’s 10-day call/put volume ratio stands at 2.50, in the 90th percentile of its annual range. This indicates a healthier-than-usual appetite for long SIG calls over puts in the past two weeks. Should Signet stock once again backpedal in the face of its 20-day, an exodus of option bulls could exacerbate selling pressure on the shares.

Whatever your forecast for SIG, now is an opportune time to speculate with short-term options. The equity’s Schaeffer’s Volatility Index (SVI) sits at just 47%, in the 12th percentile of its annual range. This tells us that near-term options are pricing in relatively mild volatility expectations for SIG — suggesting short-term contracts are attractively priced.