Pop quiz! What market sector has scored the undesirable title of “worst sector year-to-date”? Was Apple’s (AAPL) frustratingly poor price action sufficient to sabotage the tech space? Or, was the midyear flight from dividend payers enough to drop utilities into last place?
While both themes certainly contributed to the underperformance in these sectors, they were ultimately bested — “worsted,” really — by the pathetic performance of the basic materials sector.
Click to EnlargeAs shown in the accompanying performance chart, the materials space has underperformed the S&P 500 by nearly 9 percentage points. With the large-cap index up roughly 18% year-to-date, the SPDR Basic Materials Sector (XLB) should only be up about 9%.
While a 9% gain is nothing to scoff at on an absolute basis, it’s downright depressing on a relative basis. If you’re searching for reasons why Basic Materials have become this year’s sultan of suckitude, look no further than the disappointing performance of the industries residing in the sector like gold & silver, iron & steel, and metal mining. For starters, gold & silver have yet to escape the clutches of the vicious bear market that’s taken root. The latter two industries, along with others in the sector, rely heavily on a vibrant global economy with strong demand from emerging markets.
Sadly, both factors have failed to deliver.
Caterpillar (CAT) and Joy Global (JOY) are victims of the ongoing weakness in the materials space. Interestingly, both possess similar charts. Today we’ll focus on Joy Global, investigating both its weekly and daily chart.
Unlike the broader market, which has been notching all-time highs daily, JOY has fallen to a 52-week low and is once again testing a three-year support level. Further damaging the bulls’ resolve is the rampant relative weakness plaguing Joy Global for the past year and a half, as shown by the falling Comparative Relative Strength (CRS) line.
If the bulls don’t successfully defend this $48 support level, watch out below.
Drilling down to the daily chart, we see that JOY has fallen a quick 9% in the past two weeks. The ideal progression going forward would be for Joy Global stock to consolidate to work off some of the oversold pressure as well as take a breather before its next downswing.
If you think a breakdown is inevitable in Joy Global and that weakness in JOY will continue, now would be a good time to consider potential bearish option plays.
A conservative approach is to purchase the October 49-44 put spread in Joy Global by buying the Oct 49 put and selling the Oct 44 put for a net debit around $2.10. The max risk is limited to the initial debit paid; the max reward is limited to the distance between strikes minus the net debit, or $2.90. By using October options you give yourself ample time for JOY to drop below the lower strike price of $44.
In timing the entry, you might wait for the stock to drop below support to confirm it’s breaking down.
At the time of this writing Tyler Craig owned AAPL shares.