Yesterday, shortly before noon, I filmed my weekly In The Money segment with Fidelity Investments. Click below to watch and see my notes below the video:

 

Here are my notes from yesterday’s show:

Macro: The stock market is battling two competing forces, quicker than expected pace of vaccinations and rising interest rates, resulting from increased confidence that we will reach herd immunity at some point by the fall, which will allow the economy to fully reopen. This has caused interest rates to rise as bond investors believe the Fed will have to get more hawkish to curb rising inflation.

Stocks are in the hands of interest rates. The sharp rise in the last couple of months has caused equity investors to rethink valuations.

Last week, the 10yr was rejected at 1.6%, attempting to break resistance at 2012, 2016 & 2019 lows that many economists and strategists were calling generational lows. It took a global pandemic to break it.

 


Trade Idea #1: Bearish U.S. Banks Into Q1 Earnings (XLF)

The XLF has outperformed this year as the yield curve has steepened, with the spread between short-term rates and longer-term rates at its highest level in nearly 5 years. This is good for bank stocks as their net income margin on what they pay for short-term funding vs what they lend it out at longer-term is a big part of their earnings power.

Last week’s rejection in yields at technical resistance could signal the start of a retracement in yields back towards 1%. The XLF’s YTD outperformance closely tracks the move in yields.

$31 was the breakout level, but the Jan low near $29 could be the retest level if two things were to happen: 1) the influx of stimulus pressures yields and 2) bank earnings that come out in mid-April signal a sort of “as good as it gets” in the near term.

 

Bearish Trade Idea: XLF ($33.75) Buy April 33 – 29 put spread for 70 cents

-Buy to open 1 Apr 33 put for 90 cents

-Sell to open 1 Apr 29 put at 20 cents

Break-even on April expiration:

Profits of up to 3.30 between 32.30 and 29 with max gain of 3.30 at 29 or lower

Losses of up to 70 cents between 32.30 and 33 with max loss above 33

Rationale: this trade idea risks 2% of the etf price, breaks even down 4.3%, and has a max potential gain of up to 10% if the XLF is down 14% in a little less than two months, giving back all of this month’s gains.

 


Trade Idea #2: Bullish Merck (MRK)

After the FDA approved JNJ’s single-shot c19 vaccination, it was announced that MRK will enter a partnership to help make the vaccine.

Shares of MRK are down 11% on the year and down about 16% from its 52-week highs made in Sept. Take out the late March 2020 low and the stock is in a zone of technical support that it has bounced off of numerous times over the last couple of years:

 

MRK is a cheap stock, trading at 11x expected 2021 earnings that should grow 9% on 9% sales growth. The stock pays a dividend that yields 3.57% or more than 2x the 10yr U.S. Treasury Yield

Bullish Trade Idea: MRK ($72.50) Buy June 75 – 85 call spread for $2

-Buy to open 1 June 75 call for $2.60

-Sell to open 1 June 85 call at 60 cents

Break-even on June expiration:

Profits of up to 8 between 77 and 85 with a max gain of 8 at 85 or higher

Losses of up to 2 between 75 and 77 with a max loss of 2 at 75 or lower

Rationale: this trade idea risks 2.7% of the stock price, breaks-even up 5%, and has a max gain of ~11% if MRK is up 16% in a little over 4 months.

 


Lookback: On Jan 27th I detailed a bearish trade idea or hedge in the QQQ, the etf that tracks the Nasdaq 100

QQQ ($326) BUY MARCH 325 – 275 PUT SPREAD FOR $10

Now with the QQQ at $314, having traded down to $311 last week, now only slightly in the money, this put spread is worth about $12.50.

The etf has broken below the uptrend that has been in place since early Nov… it makes sense to close the short 275 call for 90 cents… and possibly look to roll the March 325 put into a near the money put spread, possibly the March 310-290…