A Potent Combination
By Paul Price of Market Shadows
Before Tuesday’s lukewarm rebound, the broad market was more oversold than at any time since late in 2012. That factor alone often provides fuel for a dynamic rally.
Hints of a possible economic slowdown magnified the negative market flavor when it came to the retail group. They hadn’t been participating in rallies prior to last week’s action and had fallen off a cliff in recent days.
That pushed many high-quality consumer-related stocks into very attractive territory.
The Great Recession of 2008-09 was the worst period in my remembrance in terms of the public hunkering down and deferring spending. I don’t see today’s situation as nearly that acute.
The confluence of the generally oversold market and the dramatically out-of-favor industry group sets the table for big gains on the hint of anything-but-the-worst news.
Accordingly, I’ve been shorting Jan. 2015 and Jan. 2016 expiration puts on a number of companies that seem sure to survive and prosper. Break-even points on some well-chosen options can take put writers down to levels that would beacon outright purchase even if you believe consumer weakness may persist for a while longer.
Some names to consider using for underlying stocks:
Prices as of Tuesday, Feb. 4, 2014
- Wal-Mart (WMT) $77.29
- Nike (NKE) $70.45
- PetSmart (PETM) $62.82
- Bed Bath & Beyond (BBBY) $64.00
- The Buckle (BKE) $42.49
- Coach (COH) $45.60
All six firms have fine balance sheets and are solidly profitable.
Disclosure: Short puts on WMT, NKE, PETM, BBBY, BKE, and COH
