Trade of the Day: Applied Optoelectronics, Inc. (AAOI)

It doesn't look like stocks have bottomed yet

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Today, I am recommending a bearish trade on the Applied Optoelectronics, Inc. (NYSE:AAOI), a company that designs, manufactures and sells various fiber-optic networking products.

While the major indices made recovered some of last week’s losses on Friday, there is still a chance that stocks could take another leg to the downside before they are able to stabilize.

In my view, the Federal Reserve’s quantitative tightening program is certainly one of the biggest factors behind the recent selloff. While the first couple of rate hikes didn’t seem to affect markets much, the Fed has been tightening all year long and is expected to hike the overnight rate again in December.

Furthermore, the central bank has now increased the pace of its balance sheet reduction to $50 billion per month from $30 billion per month previously, and this is going to have the opposite effect that the quantitative easing program had on stocks for so many years.

As always, my two key rules for investing are do not fight the tape, and do not fight the Fed. Right now, both the Fed and the action we’re seeing in the market on a day-to-day basis (the tape) are pointing to a bearish outlook for stocks.

While we could see a continued snap-back rally from the currently oversold conditions, I would not be surprised to see the market continue moving lower from here. For that reason, I’ve been recommending that my subscribers always have some protection in their portfolios in the form of put options.

Buy to open the Applied Optoelectronics, Inc. (AAOI) Dec 20 Puts (AAOI181221P00020000) at $2.00 or lower.

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