by Anthony Mirhaydari | April 23, 2014 3:58 pm
After a two-week reprieve, the bears were on the attack again Wednesday. Stocks are contending with some serious overhead technical resistance. The Dow Jones Industrial Average has moved into a resistance zone going back to December, spanning the range between 16,600 and 16,500. For its part, the tech-heavy Nasdaq Composite has hit downtrend channel resistance around the 4150 level.
The situation looked vulnerable after the low-volume, narrow-breadth rebound out of the lows set earlier this month. The evidence suggested that much of the motivation for the rebound was short covering activity in the big tech and biotech stocks that have been such a drag on overall activity since March.
Just look at the moves in the iShares Biotech ETF (IBB). It tells the tale of the tape. After peaking at $275 in February, the IBB dropped 25% into its intraday trough before reversing and finishing in the green on April 15. Shares rebounded nearly 14% into highs set on Tuesday. But now, the IBB looks like it’s going to finish the day today with a “bearish engulfing” candlestick pattern that suggests more downside is yet to come.
In response, here is a list of four short-side (or put option) candidates to profit from the return of the selling pressure — along with one long-side (or call option) candidate that’s breaking to the upside.
Click to Enlarge Housing stocks were under pressure on Wednesday in the wake of a disappointing new home sales report: Sales dropped 14.5% sequentially in March to a 384,000 annual rate, well below the 455,000 consensus estimate. Prices are unsustainably high, with the median selling price up 11.2% to a record-high $290,000. On a year-over-year basis, sales are down 13.3% while prices are up 12.6%.
The specter of fewer sales and downward pressure on prices is bringing out the sellers in homebuilding stocks.
Among the vulnerable names is PulteGroup (PHM), which is falling out of a tight monthlong trading range on a notable increase in downside volume. I’ve recommended the May $19 puts to my Edge Letter Pro clients.
PHM reports earnings Thursday morning, which could spur more motion.
Click to Enlarge An ongoing tightening of credit conditions in China, and some weak manufacturing activity data overnight, has pulled the shine off of emerging-market stocks after hopes of fresh stimulus measures out of Beijing lifted the group in March and early April.
The iShares MSCI Emerging Markets ETF (EEM) looks set to close below its 20-day moving average for the first time in a month as it rolls out of its most overbought condition since October.
The inverse ProShares Short Emerging Markets (EUM) is my pick in the 10 Best Stocks for 2014 contest. I’ve also recommended the May 14 $41 puts to my Edge Letter Pro clients.
Click to Enlarge Yoga pants maker Lululemon (LULU), which still is reeling from that see-through pants debacle, is under pressure here as retailers overall have big question marks over their heads: Was the wintertime slowdown weather-related, or the symptom of a more serious pullback by consumers?
It doesn’t help that LULU is guiding a low-single-digit decline in Q1 same-store (less online) sales as it tries to revamp its product lineup.
Shares are dropping out of a four-month-old bear flag pattern as prices drop to levels not seen since early 2011.
I’ve recommended the May $47.50 puts to my Edge Letter Pro clients.
Click to Enlarge One of the main reasons the Q1 earnings season has been so disappointing has been the underwhelming results from the big banks — who carry a lot of weight on the overall S&P 500 blended earnings per share numbers. As a result, the Q1 blended EPS growth rate has fallen to -1.1%, a far cry from the 4%-plus growth that was expected in January.
JPMorgan (JPM) is at the center of the problem, reporting a massive 68% drop in mortgage activity, a drop in bond trading revenue and less ability to pad earnings with releases of loan loss reserves.
JPM shares dropped to support at their 200-day moving average, and have skidded along for a few days, but now look ready for another down-leg. I’ve recommended the May $55 puts to my Edge Letter Pro clients.
Click to Enlarge It’s all bad news out there. The new bout of selling pressure is unleashing demand for safe-haven assets like Treasury bonds and precious metals. Gold mining stocks, which have been hit hard during the past two months, are on the move now as inflationary pressures bubble up (especially in food prices) and the geopolitical tension in the Ukraine ratchets up a notch.
Newmont Mining (NEM) is benefiting from this, with NEM shares pushing up and over their 200-day moving average for the first time since late 2012 on M&A chatter.
The May $26 calls I recommended to Edge Letter Pro clients on April 8 are up more than 25% already — and are poised for more.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
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