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This morning, I am recommending a bearish trade on Milacron Holdings Corp. (NYSE:MCRN), the plastic manufacturer.
My indicators continue to give sell signals this week as the bulls and bears battle it out at the 2,800 level on the S&P 500. The index has been consolidating between 2,800 and 2,825 for the past three sessions, and it’s anyone’s guess where it is going to move next.
At a time like this, having some bearish exposure in your portfolio is a good way to protect yourself against a shift to the downside, and there are a number of risks in the market right now.
Things are Slowing Down
First, the curve between the yield on the 10-year Treasury note and the yield on the 3-month T-bill has now inverted. When short-term interest rates are higher than longer-term interest rates, the yield curve is said to be “inverted.” Investors care about this because a yield curve inversion has been a fairly reliable indicator for recession in the past.
Another warning sign of a slowing economy is rising inventories, as they tell us that consumers are buying less goods than are being produced. Automobile inventories have been on the rise for a while now, but wholesale inventories are also starting to pick up.
Lastly, one of the reasons behind the declines we saw in the fourth quarter of 2018 was that earnings growth rates for U.S. companies were expected to slow down. It does look like that will be the case for the first quarter of 2019, and because earnings drive the stock market, this is a significant factor I’ll be watching closely.
MCRN put up disappointing earnings for the fourth quarter of 2018, and that sent the stock lower. It missed dramatically, coming in with earnings per share of $0.08. It could continue to struggle as we get closer to its earnings report in April.
MCRN Hasn’t Found a Bottom Yet
After its last earnings report, MCRN lost 7.6% in one day, and now it is over 20% lower. It broke below support at just under the $13 level, and yesterday, it set a new 52-week low at $11.19.
Daily Chart of Milacron Holdings Corp. (MCRN) — Chart Source: TradingView
I don’t think MCRN has found a bottom yet. I recommend buying a put option on MCRN. This trade expires after MCRN’s next earnings report, and if it disappoints again, we could collect a big profit.
Buy Milacron Holdings Corp. (MCRN) June 21st $10 Puts (MCRN190621P00010000) at $0.30 or lower.
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InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.