We’re Going to Double Our Money on the Weakest Stock in the Dow’s Weakest Sector
The current pullback in stocks has people talking “crossroads” – decision time for the bulls and bears.
The current pullback is still small and not decisive by itself. But there are some hints that the sellers could take control of the market, and the sector landscape reflects that.
I mean, we’re beginning to see some tectonic shifts that may be giving us a tip on where things are headed in March.
But overall, the “risk-on” sectors have remained strong performers through 2019. Sectors like biotech, semiconductors, and small caps continue to see strong scores from my Best in Breed system.
All of that suggests this pullback isn’t a head-for-the-hills moment, but a golden opportunity to make some cash…
This Onetime Dow Champ Is Rolling Over
The most bearish sector on my Best-in-Breed screen right now is transportation, as tracked by the SPDR S&P 500 Transportation ETF (NYSEArca: XTN).
For much of the year, this sector has been performing better than the S&P 500, putting it in a leadership role. But when you look beyond last December, the transportation stocks as a group haven’t really been able to grab much traction. This is one reason my Best in Breed model is steering us away from long positions in transport… and, more importantly today, identifying short-side opportunities in the group.
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From a relative strength perspective, the iShares Dow Jones Transportation Average is now falling apart as these companies begin to lag the rest of the market.
That’s strike one.
The number of new highs within the sector has crashed through the floor. As of last night, there was one – that’s right, one – stock that had broken through to a new 12-month high in the transportation group.
Close the timeframe up a little to look at the ratio of new one-month highs to lows for the transports, and you find that there are four stocks making new highs compared to 26 making new lows. This is the worst among those tracked by my Best in Breed system.
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Then there’s technical breadth. The percent of companies within the transportation exchange-traded fund (ETF) that are trading above their respective 50-day moving average has dropped precipitously over the last two weeks, from 78% to 65%. This is the largest drop among those ETFs tracked by my model and suggests that the ETF is now breaking down from a technical perspective.
With three strikes against it, the transportation ETF is among the few that falls into the bearish camp, which means that avoiding the sector is a smart move.
Whether you’re out to hedge your portfolio or make a speculative move, puts look smart here, and the XTN ETF is even more attractive because a price target of $56 is within the one- to two-month horizon.
But that’s not the only way to clean up on this trend.
Yes, that’s right: My Best-in-Breed screener has picked some stocks for us to short…
We’ve got a price target of $29 for American Airlines, so the AAL April 18, 2019 $32 put (AAL|20190418|32.00C) presents a nice opportunity to profit from a move to my system’s price target.
At $1.45 per contract, these puts offer the opportunity to double our money over the next few weeks as this relative strength laggard continues to lead the transportation sector lower.