Trade of the Day: Mattel (MAT)

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mattel - Trade of the Day: Mattel (MAT)

The big news this week was that the Federal Open Market Committee (FOMC) elected once again to leave interest rates unchanged in its latest policy meeting, although Fed members hinted at raising rates in December. I just don’t see how that’s going to be possible, given our country’s immense debt.

It’s important to note, too, that the current Fed members are a liberal group that will want to promote the current administration as we head into the presidential election next year, so Fed officials will do everything they can to keep the economy going.

Unfortunately, the economy is slowing, as indicated by the latest GDP reading of only 1.5%. That’s not a good picture. Retail inventories are also high, which tells me that a recession is probably coming. The only thing the Federal Reserve can do to stem another recession is to implement a fourth round of quantitative easing (QE), so its hands are basically tied there. The overwhelming opinion, however, is that another round of QE is not a good idea, so the Fed doesn’t have much left to work with.

Yet and still, election years are usually bullish. We’ll have to wait to see if the Fed is able to navigate the political waters and increase rates, as well.

What I do know is that my indicators are currently bullish, and momentum is most definitely up, as we have seen the big tech stocks like Facebook (FB), Amazon.com (AMZN), Microsoft (MSFT) and Alphabet (GOOG) charging ahead, influencing the major indexes.

When big tech names dominate like this, they tend to do so at the expense of other equities. For example, just this week, we saw Cummins (CMI) fall apart and melt more than 10%, NXP Semiconductors NV (NXPI) drop 19.7% on Thursday and Akamai Technologies (AKAM) get whacked some 20% this week.

Again, while big tech is carrying the S&P, if you look at the Russell 2000 small-cap index, it’s not making new highs and, in fact, it’s down for the year. The Dow Transportation Index is also down for the year, so the strength isn’t present everywhere.

This kind of atmosphere suggests the end of the momentum cycle is nearing. That said, as I’ve mentioned in recent weeks, November historically has a bullish trajectory, and the first week of a new month also tends to be bullish.

This makes it a little tricky for traders. There’s no doubt that the near-term bias is bullish, but I forecast that we’ll see momentum peter out. The timeline may fluctuate slightly depending on when momentum shifts, but I expect we’ll see the bulls keep the upper hand for the first week or two of November. Then, if the bears take over, we’ll resume a downward trend for a few months, perhaps as long as nine months.

The market is doing its best to fool investors, so stay defensive over the longer term. My general feeling is that all stocks are overpriced right now, and there is still some more bottoming that needs to occur before I would give the green light for full-scale, broad buying.

That being said, there may be some quick money to be made on the bullish side in the short term. And today’s trade is along those lines.

Buy to open the Mattel, Inc. (MAT) Jan (2016) $25 calls (MAT160115C00025000) at $0.90 or lower. After entry, take profits if the stock price hits $25.90 or the option price hits $1.60. Exit if the stock price closes below $24.00.

If after three days you still have not gotten the position filled, cancel the order and watch for new recommendations, as the profit probabilities may no longer be valid.

Additionally, if the option or its underlying stock does not hit its target, or if the stock does not close at or below its sell signal price within three weeks of entry, close the position. I do not recommend holding an option play for more than three weeks.

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