Shortly after the open today, I filmed my weekly In The Money segment with Fidelity Investments. Click below to watch and see my notes below the video:
Macro: No matter how optimistic one may be about the stock market here in the U.S. for 2021, it would seem impossible that Monday’s lows, down 2% on the year at the time, were THE lows for the year. If you agree with that, then it makes sense that there would be a sort of cleansing of some of the late 2020 excess that might come in early 2021, to shake out the weak hands, those who think that stock markets only go up, and making money in stocks is easy.
Over the last two months small-cap stocks, as measured by the IWM etf that tracks the Russell 2000 went parabolic, up 32% since Halloween, this morning following the Georgia Senate runoff elections, where one seat has been called for the Democrats, and the other is leaning that way, which would put the Senate in Dem control, at least until the midterms. Small caps are made up of mostly domestically focused companies, many hard hit by the pandemic, in financials and energy, and have outperformed their large-cap brethren on optimism of perpetually low rates, further fiscal stimulus, and vaccines putting an end to the pandemic by mid-2021. This morning’s gap higher in small-caps, vs the Nasdaq’s 1% gap lower suggests that investors think that Dem control of White House, Congress, and now possibly the Senate will accelerate fiscal stimulus, and the size of stimulus which could also be buffeted by legislated infrastructure spending, which would benefit domestically focused small-cap stocks.
The one year chart below of the IWM shows the convergence of the uptrend from its March lows with the early November breakout to new 52-week highs, just above $170:
If the markets were to correct, small caps could be viewed as the most vulnerable given the recent outperformance and the sensitivity to a delayed economic recovery in 2021 that current stock market valuations have for now priced in at current levels.
Trade Idea #1: Bullish Ford – Auto sales are coming back hard… U.S. automakers in 2021 will finally have Electric Vehicles that people want… Ford in particular is leveraging their Mustang Brand and launching an EV SUV Mustang, the Mach-e. And they are relaunching the Bronco, which will be in massive demand, 5 versions, 1 EV. Stock is cheap at 8.6x earnings, but for a reason, eps has been dealing for the last 3 years, and last year they swung to a loss on a 17% sales decline. Expect a sharp rebound. If consumers like the Bronco and the Mach-e and want to assign a higher multiple to the stock, then it is breaking out of the long-term downtrend. If they miss-execute and have delays in their Broncos and Mach-e then stock going back to mid-single digits.
Play for a breakout with defined risk:
Bullish Trade Idea: Ford ($8.75) Buy March 9 call for 55 cents
Break-even on March expiration:
Profits above 9.55
Losses of up to 55 cents between 9 and 9.55 with max loss of 50 cents below 9
Rationale: this trade idea risks less than 6% of the stock price, breaks-even up about 10%
Trade Idea #2: Bearish TWTR
On Oct 30th shares of TWTR dropped 21% the day after reporting very disappointing Q3 results. While the trends might have abated in the short term since that caused the weakness, the companies forward guidance might reflect the potential for lower political engagement from both sides as we see the Biden admin use the platform far less than his predecessor.
The stock has since risen to a new 52-week high, up 37% from its post-earnings low, and could set up as an attractive near-term short trade idea for a move back to its uptrend in the coming weeks as I suspect the company might ban trump after Biden’s inauguration which could cause some analysts to lower their estimates or ratings on the stock…
Bearish Trade Idea: TWTR ($53) Buy Jan 22nd weekly 53 put for $2
Break-even on Jan 22nd weekly expiration:
Profits below 51
Losses of up to 2 between 51 and 53 with max loss above 53
Rationale: this trade idea risks less than 3.5% of the stock price, has a break-even down a little less than 4%. The options market is saying there is about a 33% chance this stock is at break-even on Jan expiration.
Lookback: Last week I detailed a bearish trade idea on highflying cybersecurity stock Crowdstrike (CRWD)…read here
CRWD ($208) Buy Jan 200 put for $8 (actually was about $6)
During Monday’s market sell-off the stock traded as low as $196, it has since bounced, and now with the stock $207 the Jan 200 put is worth about $4.50… we want to manage a trade like this and cut our losses if the premium gets near 50% of what we initially paid…