Off and on the price chart Johnson & Johnson (NYSE:JNJ) is in position to become increasingly painful for shareholders. The upshot of this is, one investor’s tears could arguably be another’s tears of joy using a bearish risk-adjusted strategy in Johnson and Johnson stock. Let me explain.
From concerns over Syria, impeachment proceedings, and Brexit there was no shortage of headlines for investors to exercise a bit of caution heading into this past weekend. And it worked. Slightly visible risk-off behavior resulted in the Dow Industrials closing down 0.95% on Friday, while giving back the entire week’s gains with a decline of 0.14% for the period. But for Dow constituent Johnson and Johnson, conditions proved much more trying for its bullish shareholders.
Shares of JNJ tumbled by 6.22% on reports of a product recall following tests by the FDA which revealed traces of asbestos in some of the company’s baby powder. Only Dow peer Boeing (NYSE:BA) experienced slightly more jarring price action Friday as shares retreated by 6.79% on fresh reports of communications missteps with the Federal Aviation Administration.
Johnson & Johnson’s consumer unit launched an immediate investigation to determine the authenticity of the results. The action by JNJ or any company caught in a similar situation isn’t exactly surprising. But for JNJ stock there’s a lot more at stake.
Bottom-line, Johnson and Johnson can ill-afford more bad press or worse yet, physical evidence confirming health hazards tied to its products. The fact is JNJ’s talc and baby powder products have already led to paid damages of $4.7 billion last year. There’s also more than 14,000 pending lawsuits.
And with the JNJ stock price chart ready to deliver a bearish ruling of its own, the time to get short exposure is right now.
Johnson and Johnson Stock Monthly Chart
Technically, shares of JNJ have been showing indication of weakness since 2018. Around that time, shares became more volatile while hitting new highs coupled with a bearishly-diverging stochastics. Following a fairly benign and durable uptrend, this undesirable change in behavior hints strongly Johnson & Johnson stock’s bull market is giving way to a larger correction and perhaps a bear market.
Currently JNJ is still up marginally on the year (blue line) and above trend-line support. But the most recent peak in shares has already produced a potentially bearish lower high. Along with the stock’s divergent stochastics, relative weakness and bearish-looking hangman monthly candlestick, if all new trends must start somewhere, Johnson & Johnson’s days as a bull market look numbered.
JNJ Stock Positioning
As discussed in September at InvestorPlace, given JNJ stock’s elevated headline risks and financial uncertainty, positioning short in shares looks better served using a limited risk bear put spread to reduce and define exposure to a guaranteed and predefined amount. One favored bearish spread which offers investors these characteristics and still looks worth buying is the March $115 / $100 put vertical.
Since last writing about JNJ stock this vertical has grown from $1.45 per spread to around $2 in price. Today’s pricing works out to exposure of just over 1.50% for a holding period of five months, versus shorting shares of Johnson & Johnson which theoretically, exposes the trader to unlimited risk.
If we’re correct about JNJ moving lower, today’s ironclad risk of $2 in extrinsic premium has the potential to reach $15 in intrinsic value. That’s a profit of $13, or return of 650%, if Johnson and Johnson can correct and find its way below $100 and in-between the 50% and 62% Fibonacci supports tied to its 10-year bull cycle at expiration next March.
As much, while there’s no sure thing in investing until after a final ruling has been made on the price chart, a bearish indictment like this strategy does look warranted.
Investment accounts under Christopher Tyler’s management do not currently own positions in securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits
