Trade of the Day: Ryder System (R)

My indicators are neutral to slightly bearish, although I remain bearish overall for the longer term. I think the stock market is overvalued, and I am still unconvinced that the major indices are going to make any big move to the upside in the near future. I’ve given lots of evidence for that stance in recent weeks.

On the immediate horizon, the stock market is facing tax-loss selling. There are lots of stocks that have taken a pretty good beating this year, so we could see more institutional investors dumping underperformers than analysts think.

That said, while I expect heavy tax-loss selling in the next week or two to cause the stock market to decline, I forecast that some intermediate-term bullishness will hit the market as Christmas approaches.

The phenomenon of a “Santa Claus” rally, which is a period of stock market strength that usually occurs between the last five trading days of December and the first few trading days of January, has a high probability of occurring.

Since 1950, the stock market has almost always experienced a Santa Claus rally, so we’re likely looking at a strong bullish push to close out the year. During the past 25 years, the average gain in December has been about 1.8% for the major averages, so we shouldn’t ignore the fact that this can be one of the most bullish months for stocks.

The underlying bearish fundamentals and technicals of the stock market, mixed with a jolly Santa Claus rally, should effectively cancel each other out in the short term. I don’t anticipate any spectacular gains across the board, though it is likely that there will be strength in the big stocks that have led the recent narrow rally, such as Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and Netflix (NFLX), which I rarely trade because they’re too expensive.

But even those juggernauts will eventually succumb to the stock market’s wrath, so I don’t recommend trying to get into them here either. The narrow rally is sticking with us, and stock-picking in this type of environment is risky business. This is a time to be cautious and not get overtaken by the bullishness.

Ryder System (R) has been in a sustained downtrend, along with the broader transports group. Any near-term weakness will serve to push the stock lower.

Buy to open the R Jan (2016) 57.50 Puts (R160115P00057500) at $0.85 or lower.

After entry, take profits if the stock price hits $57.80 or the option price hits $2.30. Exit if the stock price closes above $64.50.

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