First off, let’s keep things simple again…
The burden of proof is on the bearish case. Unless the S&P can crack 3500 and find some followthrough, then we must assume trend continuation.
Yet within this rally, we have seen a strong rotation underneath the surface. Mega-cap tech hasn’t participated in this move, and smallcaps have been on an absolute tear.
For me, this makes sense. There areas in the market that have been suppressed due to lockdowns and the lack of fiscal support. Now it seems those narratives are starting to fade and some names are playing catchup– see Macy’s (M) and Boeing (BA) as some examples of stocks who had a “relief valve” move over the past month.
The primary risk in the market is the lack of a fiscal deal from the US. We’ve seen many times in the past that the market will throw a tantrum if it lacks fiscal or monetary support volatility will pick up. See the fiscal cliff in 2011 and the taper tantrum in 2016 as good examples.
And that’s about it in terms of primary narratives surrounding the markets. I have a hard time believing that it will be an issue in the near term as market participants are still buying hedges with a VIX in the 20s. We’re coming into the holiday season which tends to have lower volume, liquidity, and volatility… perhaps we won’t see any good downturns until we get those hedges burned off.
Primary setups here will anticipate that the rotation we’ve been seeing will continue. Ideally we get some rug-pulls in some names for good entries, and I’ll still be looking for a short in some of these lockdown names.
Trade #1: HD
HD is not getting up off the mat, in spite of the moves the rest of the market has been seeing. It may be a touch more sensitive to rates, and if rates spike on a fiscal deal then it becomes less attractive to own at this particular yield.
I’m looking for a test of the lower end of the range as the long term averages start to support price.
Expected Price: 262.66
Sell to Open HD 18Dec20 250/247.5 Put Spread
Tier 1: Enter at 0.42, Exit at 0.06
Tier 2: Enter at 0.588, Exit at 0.19
Tier 3: Enter at 0.756, Exit at 0.26
Stop Out If Close Under 249.89
Trade #2: WMT
WMT has had a nice run, but it’s similar to HD– rate sensitive and we could see a nice push into 146 to start scaling into a setup.
Expected Price: 146.23
Sell to Open WMT 18Dec20 140/137 Put Spread
Tier 1: Enter at 0.45, Exit at 0.01
Tier 2: Enter at 0.63, Exit at 0.15
Tier 3: Enter at 0.81, Exit at 0.19
Stop Out If Close Under 139.89
Trade #3: PTON
I think this our second attempt to short PTON. Look for some good sales numbers to come out and jam the stock into the earnings gap fill– that will be a good place to initiate a short.
Expected Price: 121.44
Sell to Open PTON 18Dec20 140/145 Call Spread
Tier 1: Enter at 0.7, Exit at 0.04
Tier 2: Enter at 0.98, Exit at 0.17
Tier 3: Enter at 1.26, Exit at 0.21
Stop Out If Close Over 140.11