The weakness plaguing metal and mining stocks continued in Tuesday’s trading session driving the beleaguered sector to a fresh five year low.
In the early days of the current bull market, the SPDR S&P Metals and Mining (ETF) (XME) was able to keep pace with the rest of the market. Since 2011, however, XME has followed a decisively different path, plumbing new depths every year while the S&P 500 has been climbing to new heights time and time again.
This stark divergence can be seen in the accompanying price chart. The XME ETF is shown in candle form with the S&P 500 displayed as an area chart in the background. The downtrend in the XME:$SPX ratio that began in early 2011 shows the persistent relative weakness in the SPDR fund.
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A zoomed in view of the daily chart of XME reveals Tuesday’s breach of the $29 support level.
While the sector has fallen a tremendous amount in recent years more pain looks to be in the offing. With the XME ETF unable to advance amid a strong backdrop for U.S. equities I shudder to think how it will perform if the S&P 500 enters a full-fledged correction.
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Put Spreads on XME
Traders looking to profit from a continued decline in XME could purchase the Mar $29/$26 put spread for $1.25 or better. Consider it a bet that XME will fall to $26 by March expiration. By using March options we give ourselves plenty of time for the stock to drop the necessary amount.
The max risk is limited to the initial cost of $1.25. The max reward is limited to the distance between strikes minus the net debit, or $1.75. The expiration breakeven is long put strike ($29) minus the initial cost ($1.25), or $27.75. Which means XME only needs to drop another 5o cents or so over the next two months to at least recoup your cost.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
