A Glimpse at the Stagflation Trade

In the latest version of my Weekly Strategy Session, published earlier today, I delved into some of the stronger ends of the market benefitting from rotation as long ideas headed into this week. 

However, in the following excerpt I discuss a sector which I have previously been bullish on for much of 2013. I do a bit of an about-face this weekend, as explained below. 

The other part of rising oil and gasoline prices is that eventually consumers may start to pull back on their spending habits. I had been quite bullish on the casual dining and restaurant space for a while now, but recently grew uncomfortable with how extended some of them became and the lethargic action in others.

Thus, with no interest in putting my ego above my wallet, I would be looking at some of these plays as quick short ideas now if energy prices remain stout.

I am still interested in the sector on the long side later this year, including our previously-mentioned and beloved “Steakhouse Quartet” of BLMN DFRG RUTH TXRH. However, there is no denying that the group has had a great run heretofore and could easily now be facing sudden macro and micro headwinds, on top of buyer exhaustion in their own right.

Panera has earnings this coming Tuesday, but for our purposes let us use the daily chart as an example of the type of buyer exhaustion in the sector to which I am referring. Here we have an issue which appreciated from $34 at its 2008 lows up to recent May highs of $194.

With the broad indices printing new highs last week, Panera categorically did not. This is just one example of the negative RSI weekly divergence on the S&P 500 which I discussed in the first subsection. At a minimum, Panera is acting like a prior leader now cooling off sideways.

But aggressive traders may seek out a quick short trade below $184.

Another idea in the casual dining space is the ubiquitous Cheesecake Factory. Here we have another monster which I have discussed with a bullish bent many times over the past year or so. However, the monthly chart now indicates buyers are running on borrowed time. July’s monthly price candlestick indicates potential buyer exhaustion outside the upper Bollinger Band after a prior, steep uptrend. Adding credence to that thesis is the weak and declining buy volume pattern at the bottom of the chart.

Earnings are scheduled for this Wednesday after the closing bell. But, here again, aggressive traders may seek out a quick short trade below $43.20.

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