This article was featured on Barron's Web site on Friday, but it was penned by Credit Suisse. The note starts off by stating that the brokerage views the current outlook for J.C. Penney (JCP: sentiment, chart, options) as "challenging given the ongoing ramp-up in growth capital expenditures for new store openings, a deteriorating macro environment, large private-label penetration (a disadvantage when sales are slowing), and consensus expectations that still need to come down following a prolonged period of peak margins and earnings growth." A rather inauspicious beginning to a bullish article, but the brokerage follows this lengthy statement by noting that a terrible quarter is now out of the way, and management has acknowledged that fourth-quarter and full-year 2008 sales are going to be difficult. These facts make Credit Suisse believe that the market is "beginning to discount more appropriate expectations for sales and margins in 2008 and beyond."

Credit Suisse's reasoning for upgrading JCP to "neutral" from "underperform" is that there is no belief that the retailer will be a "major underperformer from here." Part of the motivation behind Credit Suisse's upgrade is the fact that the brokerage believes that their current full-year earnings forecast of $4.31 is attainable, as it is 20% lower than the Street's estimate of $5.39. We shall see, but I have some concerns about the stock; why else would this bullish article be featured in Schaeffer's Daily Contrarian?

When an upgrade note/article starts with reasons to be concerned about the stock's future, I don't find myself harboring optimistic feelings for that equity. Yes, the stock may find a bit of support at the round-number 40 level, but that is about the only reason to be optimistic. Credit Suisse notes that JCP is down 40% on a year-to-date basis, and it has lost 25% during the past month alone. So, let's issue an upgrade! (Note the sarcasm?) The equity's rough year has placed it squarely below potential resistance from its 10- and 20-unit short-, intermediate-, and long-term trendlines. Along with the 40 level, it is possible that JCP could find support from its 80-month moving average, but this support is rather untested.

If sentiment toward JCP were a little more pessimistic, I could at least try to understand the upgrade . . . but pessimism is nowhere to be found. JCP's Schaeffer's put/call open interest ratio (SOIR) of 0.58 is lower than 95% of those taken during the past 52 weeks. This high level of optimism suggests that there is quite a bit of room for pessimism to creep in and push the stock lower. Moreover, JCP earns 5 "strong buy" ratings, 2 "buys," 4 "holds," and 1 "strong sell." If any of the bulls come to their senses and issue downgrades, we could see the stock suffer further downside, which could put any potential support to a rather strong test. Way too much optimism toward an underperformer does this make the retailer a bargain? Not in my book.