Moment of Truth
The market made a pretty decisive move this week, rallying almost every day, and finally breaking through a recently formed range. If this breakout holds, we could see a return to the previous NASDAQ upward trend and hit new all time highs.
This market continues to be impervious to political turmoil. As Donald Trump Jr. tweeted out possibly incriminating emails, markets dipped around half a percent before roaring back upward. Obviously something much larger politically could rock these markets, but for now they're doing their own thing. The fact of the matter is that unless hard evidence comes out against the current administration, the market will continue to hold its strength.
This week, we booked profits in ATVI, JD, and an epic YY trade. Members really got a chance to see the potential gains they could lock in with us.
Like we mentioned last week, earnings season is upon us. Please be aware of any earnings on companies that you have investments with. If you have been waiting to take some profits, consider that a large move in either direction could be in your future and plan accordingly. Earnings moves can also break trends in both the market and specific stocks, allowing for fantastic entry points into some of your favorite tickers.
We picked up some short-term CMG at the end of the day on Friday. The stock is sitting at support at the bottom of the range it's been trading in, and we think that we can get a nice rally this week above $400. We don't love the stock long-term, but you show us a set up like that, it's worth a look. Hopefully you'll be able to buy a burrito or two after the closing bell.
Oil has continued its rally back. We hate chasing, but a year from now, we can't imagine stocks like CHK, OII, or SN will be trading at the same levels they are now. The catalysts are there, the companies are performing well even in this choppy, volatile oil market, and the stocks are trading at relatively cheap valuations.
The same could be said about the steel stocks. We're still sitting on healthy positions in X and AKS, and if they can hold onto the gains they made this week, we're in for quite a ride higher. We're eyeing this sector very closely.
In healthcare, we like our positions in XON and GILD a lot for this week. Biotech really lagged behind in the recent rally, and the set ups look promising for both these companies. XON is a short-term hold, but we like GILD long-term.
We almost hate to say it, but even some select retail names look decent for short term pops. We'll get more into our strategy going into something like this below.
Strategy: Buying When They Hate
There's always a sector that is garnering media attention for being on death's doorstep. Retail is the most recent victim, with headlines about store closures and the burgeoning power of Amazon looming large over a lot of these companies.
Don't get us wrong, retail underperforms in a general sense. The brick and mortar is feeling real, crushing pain from the growth of internet sales. A lot of companies that have relied on this business model are beginning to see their growth slow, and are forced to change their strategies or face extinction.
But is this really a case of bad apples across the board, or are we only cherrypicking the worst scenarios and trading based off of them? GES recently saw an earnings beat that sent the stock roaring, and NKE has been on an absolute tear lately.
Usually, when the entire market beats up on a sector, it is the signal to go in and buy the best companies in that sector. All of the negativity is built into the stock price, and all of the weak hands have exited their positions, and both of these instances can carve out a nice, strong bottom that can keep the share price steady.
The problem comes with timing the bottom. There have been numerous failed rallies in retail because there fails to be a cohesive narrative tying these companies together under a winning story. However, the companies that are adapting their business strategies to accommodate an online marketplace are the ones you want to keep an eye on. The set ups couldn't be prettier, and the companies with the most fundamental strength will reward those daring enough to invest in them.
The negativity is baked in and the downside risk is minimal. Yes, there will still be a plethora of companies going out of business and the sector won't stop sucking for a long time, but the pop, when it happens, will be an incredible opportunity to generate significant profits.
What we're looking at here is the opportunity for some strong pairs trades. Pairs trading means going long one stock and short another stock in the same sector. For example, if you think that Costco is going to outperform Sprouts in the near term, then you could buy calls on COST and puts on SFM. Pairs trading allows you to be market-neutral but still bet on a sector bounce. It's a little more fundamental in analysis than what we normally do, but if you feel strongly about a certain retail company, this would be the way to go about trading it.
- The Minotaur Team