Schaeffer's Market Observation Features Charlotte Russe and Hot Topic.

CINCINNATI -- Among the stocks featured in this Schaeffer's Market Observation are Charlotte Russe (NASDAQ:CHIC), and Hot Topic (NASDAQ:HOTT). Schaeffer's S&P 500 Index Hot Stocks is just one of the many free market commentaries written every day at www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research. For additional information about this report or to have it delivered to you free via email every day click on the following link. http://www.schaeffersresearch.com/redirect.aspx?CODE=PROAW13M&PAGE=1

School Daze - Part III

Technical and Sentiment Analysis of Apparel Retailers

In Monday and Tuesday's respective looks at the back-to-school theme, I covered school-supply retailers and producers of textbooks. While books and writing utensils are of the utmost importance for studying it's equally critical to look good doing it. Last week (www.schaeffersresearch.com/commentary/premium/bgscommentary.aspx? ID=17218)(Due to its length, this URL may need to be copied/pasted into your Internet browser's address field. Remove the extra space if one exists.), Jocelynn Drake highlighted American Eagle Outfitters (AEOS) as one of the spots to stop among fashion-conscious co-eds. Today I'd like to highlight more apparel names that are most popular among adolescents. The brands listed below run the gamut from comfortable hipster threads for the pre-pubescent music fan to sleek styles for the sorority rushee.

Click the following link to see a table of sentiment data on teen apparel retailers: http://www.schaeffersresearch.com/wire?ID=17242

Two names immediately leap off the page, thanks to Schaeffer's Equity Scorecard ratings that are near extreme levels. Charlotte Russe (NASDAQ:CHIC) is set up as a potential bullish play, while Hot Topic (NASDAQ:HOTT) has been downright cold.

Charlotte Russe

CHIC is a great compromise for those who want to dress like the kids from Laguna Beach but are lacking the funds. The mall-based retailer operates under the Charlotte Russe and Rampage banners in 42 states, offering the latest in trendy fashion at up to 30 percent below its competitors' prices. Revenue has grown nearly 32 percent during the past year, while quarterly earnings have surged 77 percent, according to Yahoo!Finance. When the company last reported quarterly earnings in late July, it posted a 77-percent increase in net profit, while sales rose 32 percent to $162.6 million.

Technically speaking, CHIC sure is pretty. The shares have been in rally mode since early last summer, nearly tripling in value thanks in part to long-term support from their rising 40-week moving average. In recent days, the stock has benefited from shorter-term assistance in the form of its 10-week trendline.

CHIC shares have also hugged their 10-month moving average since initially breaking out above this trendline in May 2005. The stock hurdled potential double-top resistance at the 22 level and is now trading at its highest point in more than four years.

Helping CHIC earn its stellar Schaeffer's Equity Scorecard reading of 8.0 is the continued backdrop of skepticism framing the shares, in spite of their strong price action. Let's begin in the options pits. In the front three-months' series combined, there are currently only about 1,000 open contracts (calls and puts), lending credence to the supposition that CHIC has not yet caught on among the speculative crowd. This is a sign that sideline money still lies in wait to help usher the equity higher.

Additionally, short interest on CHIC rose 16 percent in August, leaving nearly seven percent of the stock's float sold short and building the foundation for a modest short-covering rally, should the stock continue to press higher. The one strike against CHIC is the lack of "sell" ratings from Wall Street, reducing the likelihood of near-term brokerage upgrades. But some bullishness is typically to be expected on outperforming stocks, and this is by no means a deal-breaker. For another recent look at CHIC, I invite you to read Ryan Detrick's August 15 article, Three Bargains From the Retail Sector (www.schaeffersresearch.com/commentary/observations.aspx?ID=17140).

Hot Topic

If you are anything like my brother-in-law (or my colleague Joseph Hargett), with a passionate interest in metal music but a soft spot for SpongeBob Square Pants, Hot Topic might be just the store for you. According to Hoover's, the chain boasts 660 eponymous mall-based locations throughout the U.S., as well as 120 Torrid stores for plus-sized shoppers. Earlier this month, the Generation-Y retailer reported a second-quarter loss of two cents per share, matching analysts' expectations. Looking forward to the third quarter, HOTT officials expect to bank profits of 16 to 18 cents per share, despite a mid-single-digit pullback in same-store sales for the period.

A brief rebound in HOTT shares was nipped in the bud on August 1, when the company reported a surprising pullback in same-store sales for July and the second quarter. This move dropped the stock below its 10-day and 20-day moving averages, below which the shares still reside. What's more, HOTT has failed to muster any sort of rally attempt after this gap lower and has instead preferred to retreat lower during the past few weeks.

A trend of lower lows has ushered HOTT more than 65 percent lower since its January 2004 peak. Recently, the shares breached their 80-month moving average, which went on to forge a bearish cross of the stock's 10-month trendline, signifying the risk of future downside. The shares are now plowing through territory not explored since mid-2002. One of the more disturbing things about HOTT (other than the Marilyn Manson tee-shirt I spotted in there several months ago) is the utter devotion levied on it from the options crowd. Schaeffer's put/call open interest ratio (SOIR) for HOTT weighs in at 0.14. This means that in the September, October, and November series combined, there are only 14 open puts on the stock for every 100 open calls. This reading obviously skews toward an optimistic extreme and is in fact lower than 97 percent of the past year's worth of data. Should the equity continue to pull lower, some of these bullish options players could head for the exits, exacerbating the selling pressure on the shares.

Analysts are also enthusiastic toward HOTT, as all but one of the 14 brokerage firms following the retailer have named it a "hold" or better. With the equity in the territory of multi-year lows, the risk of brokerage downgrades is palpable.

One thing HOTT has going for it, from a sentiment perspective, is short interest. After a modest increase last reporting period, more than 17 percent of the stock's float is devoted to the short side, resulting in a short-interest ratio of 5.7 days to cover. This provides a fair amount of fuel to spark a short-covering rally, but is there any reason why the bears might want to abandon their positions? Perhaps in an attempt at profit taking, but as the equity's decline has been gradual in scope rather than sudden, the likelihood of a mass profit-taking campaign is reduced.

Schaeffer's Equity Scorecard currently ranks HOTT a 1.0 on a scale from zero to 10, suggesting a fairly safe bet of further declines from the shares.

Click the following link to see weekly and monthly charts of CHIC and HOTT: http://www.schaeffersresearch.com/wire?ID=17242

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About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com, is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method.