Metal stocks are waking up. With inflation expectations ratcheting higher and the anticipation of further rate hikes, capital is flowing into late cycle stocks. And this is boosting shares of the SPDR S&P Metals and Mining (ETF) (NYSEARCA:XME). Indeed, XME is fast approaching a new 52-week high.
Yesterday’s rally was particularly impressive given that it occurred while the broader market (see S&P 500) fell to profit-taking. XME’s ability to stay aloft while sellers cut the market off at the knees is a reflection of its relative strength. And if you’re a believer in relative performance, then you’ll agree that strength typically begets more strength.
Another ace in the bulls’ hand is XME shares are well below their all-time highs. Unlike virtually every other sector on the Street, which are skirting the stratosphere, XME only just recently bottomed and entered a bull market. And that suggests the downside risk is decidedly less than those that have been bid into bananas territory.
For the uninitiated it’s worth mentioning a few of the top holdings in XME to provide a sense of which companies the fund provides exposure to. Consol Energy Inc (NYSE:CEIX), Freeport-McMoRan Inc (NYSE:FCX), and Century Aluminum Co (NASDAQ:CENX) are among its constituents. It also carries coal and steel companies along with others dealing in various metal and mining operations.
From a charting perspective, the XME ETF is really starting to take off. This week’s rally has carried the fund well above its 20-day and 50-day moving averages.
The breakout over resistance at $33.50 provides particularly compelling evidence that buyers are pressing their advantage. Notice the elevated volume in recent weeks confirming that institutions are entering the fray.
Sell XME Puts for Cash
Admittedly, the fund is getting overbought in the short run. A pullback is probably in the cards, or at least some consolidation. But I would view either outcome as a buying opportunity.
The low price tag of XME makes it a prime candidate for option selling. The margin requirement is low which makes the potential return on investment high.
If you’re willing to bet XME sits atop $33 by February then sell the Feb $33 put for 53 cents. The initial premium received represents the max reward and will be captured if the puts sit out-of-the-money at expiration. If the ETF falls below the put strike, you will be obligated to buy shares at an effective purchase price of $32.47, which seems a decent entry point if your bullish on metal stocks heading into next year.
In timing your entry, consider waiting for a down day or two that will allow you to sell the put at an even higher credit.
At the time of this writing, Tyler Craig owned shares of XME.