The knife and the spoon
06/20/18

The old saying “never try to catch a falling knife”—a warning about the danger of buying into a market that’s falling too far, too fast—may need to be tweaked in regard to a certain stock: Never try to catch a falling spoon.

Campbell Soup (CPB) has been in a downtrend since peaking near $68 in early July 2016, and by the time it hit a nearly six-year low earlier this month, it had shed more than 50% of its peak value:

Campbell Soup (CPB), 1/15/18 – 6/19/18. Campbell Soup (CPB) daily price chart.

Source: OptionsHouse

The stock’s most recent breakdown came courtesy of Campbell’s May 18 quarterly report which, despite besting both earnings and revenue estimates, revealed a revenue decline from the previous two quarters,1 and coincided with lowered forward guidance and the unexpected “resignation” of its CEO.2 After a brief bounce the stock sagged again, ultimately hitting $32.63 on June 7:
Campbell Soup (CPB), 11/7/11 – 6/19/18. Campbell Soup (CPB) weekly price chart.

Source: OptionsHouse

But CPB reversed to close up that day, and then rattled off six more up days—and a 13.7% rally—as of last Friday. The stock more or less traded within Friday’s range the past two days, which may seem like non-news except for the fact that it did so when the broad market was selling off. Yesterday morning, for example, when the S&P 500 (SPX) was down more than 1%, CPB shares were solidly in the green.

While there weren’t any positive news stories that may have helped explain the stock’s outperformance (other than some relative strength in the consumer staples sector over the previous week), there was bullish CPB options activity, including higher-than-normal call options volume, and around 19 call options traded for every put option, as shown in the following LiveAction scan:

LiveAction scan. High CPB call/put ratio

Source: OptionsHouse

So, what if the knife, or spoon, has already hit the floor and someone’s in the process of putting it back on the table? In other words, what if all the bad news is priced in?

As is always the case, certainty is a trading pipe dream. Some traders and investors could look at the recent price action and see it as nothing more than the latest in a series of temporary rebounds within a longer-term downtrend. And they could certainly be right. From a trading perspective, though, the argument could be made that the stock’s recent relative strength and options activity suggest that even if that outlook is correct, the move may have more bounce left in it.

More importantly, the stock is currently at a level that makes it very easy for traders to define risk—that is, determine if they’re right or wrong about their outlook. For example, a long-side trader may look for a move out of the current mini consolidation to at least the top of the May 17-18 price gap (around $38.87); a more aggressive target could be the lower breakdown level (around $40), while an even more bullish outlook may anticipate a move to the higher breakdown level (around $45).

Similarly, the most risk-averse buyer may see a move more than a little below Friday’s low of $36.24 as a sign the bounce has ended, while traders who see that threshold as too restrictive (too likely to result in getting stopped out) may risk a move down to a little below the May highs (around $35), while others would be willing to accept a challenge to the June low. (Bearish traders, of course, would simply flip such targets and prospective stop levels on their heads.)

Trading isn’t about being right all the time, or even most of the time (although that helps). It’s about being able to pick your spots and find attainable rewards with acceptable risks. 

 

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1 StreetInsider.com. Campbell Soup Co. (CPB) Earnings. 6/19/18.

2 MarketWatch. Campbell Soup shares fall after earnings guidance cut. 5/18/18