With markets jittery all over the place, the one area investors still seem to be pretty confident in is the Home Builders. And why not? In a declining interest rates environment, home buyers can finance purchases at historically low interest rates -- why wouldn't they be buying and building new homes?
Of course, even in the strongest names, this is no time to be a hero. Prudent risk management is still job #1 and we are not looking to be too aggressive here. Therefore, we've got a bullish play on tap, but we're approaching it in such a way so as to put ourselves in position to participate in upside as cheaply as possible.
Back in April, we attempted to get long Texas Instruments $TXN, but the stock gapped higher at the open on our entry day and it didn't come back for a month. So we missed it. And that was a bummer. But sometimes, life (and markets) gives us a second chance. And here we are.
Let's not waste any more time. We're getting to work!
While many stocks and indices are attempting to repair themselves from recent August volatility, the Energy sector continues to be mired in a year-long downtrend. And considering many of our current positions are leaning long, it is always good to have some counterbalancing positions in the portfolio. We've got a conservatively bearish play on deck to help accomplish this mission.
One area in the market that has been maintaining a pocket of strength is the Home Builders sector. And with the Federal Reserve cutting interest rates recently (with the possibility of more to come), it's likely mortgage originations will remain strong and therefore new home builds will continue their firm pace. Of course, to price-action watchers like us, all that fundamental and economic data is mostly noise...
Judging by the price action of the stocks in this space (the only indicator that really matters), it seems investors are betting on housing remaining a powerful economic driver into the near future. So, to ride this wave, we've identified a nice situation offering us great potential reward for limited risk.
In a recent blog post on All Star Charts, we discussed the importance of big bases. In a nutshell, we like big bases because it reveals levels of "price memory" and indicates institutional support. You can read the post here.
At times of market uncertainty, indecision, or stress, it can be constructive to focus our attention to stocks in the process of building bases or just emerging from them. Today's market environment certainly qualifies as uncertain if not also indecisive. As such, we're digging into stocks that have recently broken out from significant bases.
While we haven't raised the Bear Flag quite yet, we have noticed some outperformance in stocks that often are referred to as "defensive." And the recent outperformance of the Aerospace and Defense industries has been particularly noticeable.
As geopolitics tosses and turns from tweet to tweet, we'll focus on the downstream side effects in public markets that offer nimble players the opportunity to profit. And we've got a name lined up that appears to be directly benefiting from recent global "uncertainty."
When the market seas get choppy, options premiums tend to inflate everywhere you look. Investors get scared and Speculators smell opportunity, both putting a bid under calls and puts as each is willing to pay up for protection and good fortune, respectively.
However, regardless of market direction, options premiums tend to mean revert. In other words, they tend not to stay high for very long before retreating back to some version of average. This creates an opportunity for nimble options traders to profit off of others' misguided notions.
This being our current backdrop, I've identified a nice instrument for fading the current volatility spike.
Believe it or not, there are still some stocks at or near all-time highs in this current market environment. And if we're of the mind that the recent selloff is just another "glitch" that repairs itself through price and time, then we'll want to position ourselves in the leading stocks that will drag us higher in the next upswing.
We've identified one stock doing the heavy lifting for a sector that is showing signs of mean-reverting higher and offering a good potential payout if it works out.
Scanning through the plays that appear in the latest All Star Chart Quarterly Playbook, I see many that have pulled back into support levels and/or near levels that we previously labeled as "bullish above." This offers a clue that perhaps stocks are heading into a rest period. We've had a good run off the "Christmas Miracle" bottom and maybe here's where stocks catch their breath?
With that as a backdrop, I scanned our universe of liquid ETF names and found a candidate to put an income trade on to benefit from any sideways action we may be headed into.
With earnings season in full swing, unique opportunities with options often spring up.
It's pretty common for the prices paid for options to increase leading up to earnings announcements. It's a classic example of the battle of fear and greed playing out. On one hand you've got nervous shareholders purchasing insurance to protect themselves from any serious adverse price action, bidding the prices of puts higher. On the other hand, you've got shark speculators looking to participate in a sharp reaction to make a quick buck in either direction, adding further buying pressure to both puts and calls.
The astute options participant can use this battle to leverage into his own vision of the big picture.
I don't make it my primary business to go against the trend. Sure, it can be pretty satisfying and certainly pays well to nail a turn in a major trend. But it's a tricky business that has left behind a graveyard of wannabe Heroes.
But every so often the stars align, risk is clearly defined, and supporting evidence suggests a turn may be at hand.
