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This morning, I am recommending a bullish trade on AbbVie, Inc. (NYSE:ABBV), the biopharmaceutical company.
My indicators are giving neutral readings this week, a slight downgrade from last week’s bullish readings.
After setting a new all-time high of 2,964.15 on June 21, the S&P 500 has once again pulled back from the high end of its ongoing trading range.
It has now failed to decisively clear the 2,940-2,960 range on three separate occasions — first in September of 2018 just before the fourth quarter’s sharp decline, then in early May and most recently just last week.
Right now, there is a lot of uncertainty about trade issues, and the market is waiting to see what will happen at President Trump’s meeting with Chinese President Xi Jinping at the G-20 summit.
Various reports are indicating that the two leaders are open to a potential trade-war truce, but I’m still skeptical. I think a negative or neutral result is the most likely scenario. However, expectations for a positive outcome are so low that even a less-bad outcome might be seen by the market as a win.
With all that weighing on investors, it’s not surprising that the S&P 500 is having trouble sustaining bullishness at new highs. But there is still some bullishness left in the market. As you can see in the chart below, the S&P 500 is still above its 50- and 200-day moving averages. That’s a good sign.
If we’re going to enter a bullish trade going into next week, it needs to be on a stock that will appeal to investors during this uncertain time.
The Case for ABBV
Earlier this week, ABBV dropped by over 16% when it announced it would acquire Allergan plc (NYSE:AGN), the specialty pharmaceutical company. I think the move was overdone.
In 2015, Pfizer Inc. (NYSE:PFE) was willing to pay $160 billion for AGN, but U.S. regulators blocked the deal. Even though AGN has lost value since that time, ABBV’s $63 billion bid looks like a deal.
ABBV’s lower price makes it that much more attractive. It has a dividend yield of 6.11% at its current price. In an uncertain market, a strong dividend is appealing.
In the long term, I think acquiring AGN will push the stock higher, and if we turn to the daily chart, we can see ABBV is starting to recover.
Filling the Gap
On the daily chart, we see that after the huge gap lower from ABBV’s announcement, the stock pushed even further below $70. That was the lowest the stock had been since 2017.
In an acquisition, the company being acquired usually jumps in price, and the company doing the acquiring falls. But ABBV moved too far to the downside. Because it is already pushing above the $70 level, I think investors are using this opportunity to pick up a strong, dividend-paying stock in an uncertain time.
ABBV may be even more appealing once we see the results of the G-20 meeting, and I’m expecting it to fill in the gap to the upside. Get in now with a bullish call option.
Buy to open the AbbVie, Inc. (ABBV) Aug. 16th $72.50 Calls (ABBV190816C00072500) at $1.55 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.