Short Trade 07/03/13

Some think that shorting is "unAmerican", so maybe this wasn't a good day to put this trade on, but Tempur Sealy (TPX), which was formerly TempurPedic until they did their big acquisition of failing Sealy, is a good short.  I actually picked it last week for a quarterly contest with some investment professional friends of mine (other picks were longs - ANV, MAKO and MASI).  The fundamental issue is that they took on a lot of debt, and the management team isn't very good.  The stock isn't exactly cheap either - 16PE.  Rising rates are another issue that could lead to some concerns, as home sales can drive mattress sales.  Also, the company is losing some of its power as Mattress Firm has become a huge customer.  These are the fundamental issues, and we will look at the technicals below.  

The trade is a short at 43.98 with a target of 39 and risk to 45.  Again, I am no longer using hard stops - these are guides as to how I expect to trade the stock.  The trade ends by 7/18, which is before their next earnings report, which is likely near August 1.

I start with the weekly over the past two years.  These guys were blind-sided a little over a year ago.  Not a sign of a good management team.  From a technical perspective, notice that we have been in a downtrend now since peaking in late March.  The stock is up nicely year-to-date still, but it has been lagging the market after running into trouble near 50.

The 50dma is now falling and is at 44.83.  I think that will serve as resistance (we used 45).  In terms of target, I think 40 is obvious, which gets us to about 4:1 reward-to-risk, but I am aiming for a little more.  39 is a new low that would extend the cycle of lower highs and lower lows.  It also gets us back to that February consolidation.

The 5-day chart helps us to see the resistance up near 45.

Posted to The Analytical Trader on Jul 03, 2013 — 1:07 PM
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