Trade of the Day: McDermott (MDR)

Protect yourself against a market downdraft with puts on this struggling contractor

   

Trade of the Day: McDermott (MDR)

Stocks weakened on Thursday, driven lower by trouble overseas, but our indicators remain cautiously optimistic. Our index indicators are giving bullish to neutral readings, a downgrade from last week’s bullish reading. This is a sign that stock market weakness undoubtedly persists, and the thought that stocks would soon enough continue the low-volatility bullishness they exhibited last year can now be called into question. For things to improve back to bullish, the Dow needs to move back above 16,140. Meanwhile, the S&P 500 needs to stay above 1,830, and the Nasdaq must stay above 4,210.

Our 200-day Moving Averages Index, Advance/Decline Index and Cumulative Volume Index internal indicators continue to give bullish readings, as do all nine S&P sector funds. From a longer-term chart perspective, stocks are still bullish. Economic numbers are also showing signs of improving. So what gives? Quite simply, emerging markets are very weak, and geopolitical troubles remain. The fear that a sudden meltdown might occur is gaining strength.

Those fears are evident in renewed strength shown by long-term Treasury bonds (TLT). This has allowed TLT to cross back above its 200-day moving average, but over the longer term, the trend for bond prices still appears to be higher. TLT can call this trend into question by moving above $109, but in light of the reasons that might spark such a rally, weakness in TLT is a more preferable turn of events. No one wants to see emerging markets collapse or hostility break out in the Ukraine. Also reflecting the newfound fear in the stock market, gold prices have been rallying since December.

With our indicators continuing to reside in bullish territory but weakening, options traders should begin to add more puts to your portfolio, as it never hurts to have some portfolio insurance in your pocket.

Along these lines, my bearish play for you today is on McDermott International (MDR). The offshore oil-and-gas contractor made the headlines on Mar. 3 after reporting quarterly earnings that came in under consensus expectations – promptly earning itself a downgrade from Capital One (COF) analysts and sending the share price gapping down by 8.3%.

Since then, our indicators have determined that MDR shares have a very poor outlook in both the short term and the intermediate term, assigning them a far more bearish rating than other construction peers like Paccar (PCAR) and Fluor (FLR).

Buy the MDR May 8 Puts at $0.70 or lower. After entry, take profits if the stock price hits $7.00 or the option price hits $1.20. Exit if the stock price closes above $8.20 or the option price closes below $0.50.

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Article printed from InvestorPlace Media, http://investorplace.com/2014/03/stock-market-trade-of-the-day-mcdermott-mdr/.

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