Casual Dining Plays in Focus

Here is an excerpt from this past weekend’s Weekly Strategy Session, where much of my analysis focused on the increasingly selective nature of the market. CHUY, in particular, looks to be a casual dining stock to watch going forward. 

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In the casual dining space, names like CAKE and EAT have turned into phenomenal price performances of late. However, as you can see below on their respective daily charts, both stocks are now too far extended beyond low-risk entry points for swing traders seeking longs. Even in a bull market, we must not stray too far from our core discipline. Both stocks are stretched beyond their 20-day moving averages, for example.

These charts conjure up the phrase, “Look, but don’t touch,” as chasing extended stocks opens up the distinct possibility of a sharp shakeout lower. Of course, these stocks could easily base sideways a few days and work off their overbought conditions through time, rather than via price pulling back. But headed into early-next week we want to avoid chasing those extended names, for now.

However, let us take a step back and consider what is happening here–These casual dining stocks seem to be in high demand with investors, as a group. Therefore, it behooves us to look for rotation into non-extended plays within this sector. The thesis here would be that profits in extended casual dining stocks could easily be locked in temporarily, and that capital would presumably rotate, or roll, down to non-extended names in the same hot sector. For this thesis to prove correct, the overall market would likely need to remain resilient.

With this in mind, the following casual dining stocks are not nearly as extended as CAKE and EAT above. I would be watching for rotation within the sector down to these names next week. Note how they are all basing tightly with volume patterns favoring buyers, or at least indicating a lack of heavy sellers. In particular, back above last Thursday’s highs, and BBRG CHUY should have good momentum to run.

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