My indicators are giving sell signals again this week, as market breadth — the ratio of advancing stocks to declining stocks — continues to weaken.
My last few long option recommendations have been bearish, but I think traders should maintain both some bullish exposure and downside insurance as we head into 2020. That’s why I’m recommending a bullish call option on L Brands, Inc. (NYSE:LB), which operates retailers like Victoria’s Secret and Bath & Body Works.
The market dropped about 3% over the past week on trade-related headlines and negative manufacturing data. Though the market has recovered more than half of that loss in the past two days, it’s hard to say at this point whether the volatility is over.
Daily Chart of S&P 500 Index (SPX) — Chart Source: TradingView
As you can see in the chart above, the S&P 500 index has been trading in a fairly tight range between 3,090 on the low end and about 3,150 on the high end since mid-November.
This back-and-forth action makes it hard to get a good read on where it will go next, although the trend does remain to the upside.
And December — particularly the latter half of December — is typically a bullish time for the markets.
Why Look at Retail?
Retail stocks are in an interesting position. Companies like Target Corporation (NYSE:TGT) and Walmart, Inc. (NYSE:WMT) have been performing well because their online segments are growing. But companies like Home Depot, Inc. (NYSE:HD) and Kohl’s Corporation (NYSE:KSS) struggled after providing poor guidance.
I don’t necessarily believe retail is the best sector to look at long term, but there’s no denying that the holiday season provides a boost to most of these companies.
LB met earnings per share expectations and beat revenue estimates in late November. With the strong labor report this morning, I think the U.S. consumer looks strong heading into December.
And LB’s other appeal is technical.
LB has underperformed the rest of the market this year, and that means its stock is very cheap. Investors looking for bargains to take advantage of holiday bullishness may look to stocks like LB.
Could $18 Become Support?
If you look at the chart below, you can see that the $18 level acted as resistance for LB through most of October and November. But after it reported earnings, the stock broke above that level.
Daily Chart of L Brands, Inc. (LB) — Chart Source: TradingView
LB pulled back with the rest of the market this week, and it dipped below the $18 level. However, it pushed above $18 on Dec. 4, and it managed to hold above it on Dec. 5. If that old resistance level becomes new support, the next resistance level LB needs to overcome is in the $19.50-$20 range.
I think, in the short term, the stock can get above $20 with a little help from holiday spending.
Buy to open the L Brands, Inc. (LB) Jan. 17th (2020) $20 Calls (LB200117C00020000) at $0.80 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.