Last week’s plunge in bond yields is fanning the flames of recession fears once more. Bulls are cowering in their hidey-holes and bears are finally starting to feast — really for the first time this year. And that gives us an attractive backdrop to begin seeking out weak stocks to trade.
Finding stocks to sell has been a challenging endeavor in 2019. Ever since the early-January transformation of the Federal Reserve from hawk to dove, it’s been game on for risk assets. But last week’s yield curve inversion has investors spooked.
My weekend scanning found numerous bearish looking charts that are worthy of mention. Today I’ll mention the top three stocks to trade. They remain vulnerable to further downside as long as recessions and inverted yield curves dominate the market narrative.
The bear case for FedEx (NYSE:FDX) shares is compelling on both a technical and fundamental front. To fully feature the depravity of its downturn, I’m featuring a weekly chart. Since topping in early-2018, the transportation titan has cratered 37% and now rests below all major moving averages.
The January-February rebound created a classic bear retracement pattern that already triggered to the downside.
On the fundamental front, earnings are deteriorating, and during last week’s quarterly report the company cited slowing global growth as one of its key concerns moving forward.
To bank on continued weakness, buy the May $175/$165 bear put spread for around $3.70.
The price action in Caterpillar (NYSE:CAT) has echoed the bearish steps of FedEx. CAT stock was demolished in the fourth quarter amid economic slowdown fears, and it has yet to find its footing. Indeed, the daily chart is a volatile mess — making it one of the top stocks to trade right now.
January’s large earnings miss and subsequent down-gap in the stock is keeping the sluggish global economy talk in the forefront. With Friday’s high volume drop taking CAT back below its 50-day moving average, a new down-leg is upon us.
The recent uptick in implied volatility is breathing new life into option premiums. So let’s create a cash flow play. Sell the April $138/$142 bear call spread for 55 cents. If CAT sits below $138 at expiration, you will capture the max gain of 55 cents.
Bank of America (BAC)
For our stock to trade, we’re turning to the banking sector. Banks are particularly vulnerable during times when the yield curve inverts due to the pressure it puts on their profitability. Remember, short-term interest rates signify what banks pay depositors and thus represents an expense. Long-term rates represent what they charge when lending and thus represent income.
During periods of yield-curve inversion, their income potential drops while expenses stay the same or rise. That’s a toxic brew for any company. Tack on the inverted yield curves’ impeccable track record for predicting recessions and it’s no wonder why banks bit the dust on Friday.
Bank of America (NYSE:BAC) upended its recovery efforts by shattering support last week. It’s oversold, yes, but there remains little reason to be bullish here.
Bet on more pain by purchasing the June $27 puts for around $1.45.
As of this writing, Tyler Craig held bearish positions on FDX. Check out his recently released Bear Market Survival Guide to learn how to defend your portfolio against market volatility.