Today, we’re opening a new bearish trade on Exelon Corporation (NYSE:EXC). Investors poured into high-dividend, defensive sectors this quarter on a quest for yield. This was very unusual and led to new highs on the major indexes that were primarily driven by what traders usually consider “defensive” stocks. Utilities in particular were beneficiaries of the flow of capital, so stocks like Exelon wound up extremely overbought. We’re projecting that the stock is due for a downturn.
For example, Exelon’s P/E ratio is hovering over 25, which is the same level the stock hit before the last big decline in 2008 and more than double its level in the years from 2009 to 2012. Granted, P/E is not the most precise measure of value, but extremes like this can’t be ignored. We have been interested in its movement following earnings last week and it looks like the stock has a long way to fall as longs get squeezed. What we expect is that investors will want to get out before the dividend ex-date on May 13. If investors have been buying EXC and other utilities in anticipation of dividends they will want to avoid the selling frenzy that often follows the ex-date on overbought stocks like this.
Click to Enlarge This trade is bearish on the stock, but not necessarily bearish on the market. If stocks continue to perform this week, which would not be unexpected considering how light the news schedule will be, then we expect investors to continue rotating out of utilities and into riskier trades. That would be in our favor. However, if the market does fall unexpectedly, EXC is overbought and should amplify those losses. Defensive sectors don’t necessarily go up in a bearish correction, they just tend to drop less assuming they haven’t already run-up.
‘Buy to open’ the EXC June 35 Puts (EXC130622P00035000) for a maximum price of $1.00.
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InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.