Adidas (XETRA: ADS) is in the fight of its life as it is trying to regain its competitive edge on US soil after losing the battle to Nike and Under Armour. The German retailer is also facing difficulties in Europe, however, the one thing that helped their stock price was the ECB (European Central Bank). The recent quantitative easing (QE) program that started in Europe is destined to inflate assets, and the main beneficiary is the stock market.
The ECB started the QE in a desperate case to bring inflation higher but the timing of the program is different than in the rest of the world. Japan has already been doing its own QE for more than two years now and the United States ran a similar program for a long period.
Inflation is still not showing but the fact that the ECB started the QE program so late may mean that the tapering of it would come faster than we expect. The only prerequisite is for inflation to show.
We have already seen some action in that direction in the sense that manufacturers in Europe have raised prices and this means we may have a bottom in inflation expectations. This in turn will put pressure on Draghi and the ECB, as from now on all press conferences will have questions regarding the possible tapering.
According to the current plan, the ECB is intending to do the QE until September 2016, but if inflation picks up then they will be forced to act.
What has this got to do with Adidas? Well, any tapering is negative for stocks and Adidas will not be spared. However, for the medium term, the stock price looks supported and even more of an upside may come. I am, however, interested in a lower striking price.
The recent move from the 50 level all the way above the 70 in less than half a year goes hand in hand with the ECB policy and the way the Xetra (the German equity index) is moving.
From a technical point of view, there is a possibility for a double top at current levels. I would wait for the measured move to come before rushing to buy call options.
Therefore, a move back to the 65 level, the previous resistance, should be a nice striking price with an end of month expiration date as resistance should turn into support now. If this move doesn’t come, then waiting for CPI (Consumer Price Index) releases and trying to interpret the ECB’s next move based on the CPI number is the way to go.
A higher CPI should bring tapering and this means lower equities, while a lower CPI is the equivalent of higher equities. Therefore, both call and put options can be traded based on fundamental and/or technical analysis.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
