I will be the first to admit when I am wrong. Less than two
we were at the beginnings of a new bull market because the economy
was improving and valuations were low. That now appears to have
been premature because the demons of the 2008 crash have not yet
The real issue is that we're in the midst of an unusual bubble, one
that's just as irrational as any other: a risk-aversion bubble.
Most people focus on the risk-taking element of capitalism, but it
also applies to self-preservation. Just as sentiment can go too far
in the direction of euphoria, the pendulum can swing back in the
opposite direction, as we are seeing now.
Treasury yields are the main indicator to gauge this trend. After
staging an abortive attempt to rebound in March, they have now
thudded back down to last year's support levels. I expect them to
churn in a range for months or make new lows, taking stocks along
for the ride. This will probably result in an annoying
back-and-forth rather than an outright selloff. In other words,
there is no trend to trade.
One pattern that has emerged, however, is liquidations in stocks
that were formerly one-way bullish growth names, such as United
Rentals (URI), Sturm Ruger (RGR), and Nu Skin Enterprises (NUS).
The fundamentals in these companies remain excellent, but their
charts have broken down, which suggests that investors simply don't
want to own stocks that are sitting on huge gains when the rest of
the market is weak.
In my view, the best strategy now is to look for other high-flyers
that have lost their mojo and are now potential shorts. Starting
from researchLAB's bullish chart box, I clicked on the
button to find stocks that have been trending higher. I then
modified the criteria:
• Remove: Last > 20-Day Moving Average
• Add: High > 50-Day Moving Average
• Add: Last < 50-Day Moving Average
• Add: Last > 100-Day Moving Average
(For a shortcut to this screener,
Once these stocks were loaded, I clicked on the
column to sort by descending values. The resulting list shows
stocks that have rallied hard in the last year but have now showing
signs of reversal. (Adding the criteria of a "high" above the
50-day but a "last" below the 50-day, we find stocks with
potentially bearish "shooting-star" candlesticks. These tried and
failed to close above that key level.)
Based on yesterday's closing values, here are some results:
Yes, it's been a beautiful trade, but the stock has been making a
nice rounded top. It made a lower low on Friday and now looks to be
making a higher low below the 50-day. The $119-$120 area level
appears to be the new resistance. V also has weekly options, and
the short-term in-the-money puts are cheap.
Discover Financial Services (DFS):
Similar story to V. The option liquidity isn't as deep, but the
32/30 put spreads in June or July potentially make sense.
Yum Brands (YUM):
This stock has held up remarkably well given all the worries about
China, but now it, too, is making lower lows and meeting resistance
at the 50-day. The 67.50/62.50 put spreads in June or July look
particularly interesting. Volatility is historically low in this
name, so if it tanks you could also benefit from a pop in vol.
Nice double-top around $59. The entire health-insurance space has
been flashing warning signs recently as medical costs climb. The
only proviso is that the Supreme Court could give the industry a
boost by the end of June if it overturns Obamacare. UNH could
potentially be shorted for the next two weeks. Then, if the
justices rule against the law, sell the pop after the news comes
Other names that came up on my bearish-reversal screener included
Artic Cat (ACAT), Dollar General (DG), O'Reilly Automotive (ORLY),
and Tyco International (TYC).
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of May 23.)