Coronavirus fears are fading, and stocks have officially returned to record highs. The Nasdaq Composite led the recovery, but the S&P 500 has now joined its tech-heavy brother by eclipsing January’s peak. But bears still hold the upper hand in certain companies. These laggards are locked in downtrends, which makes them all attractive stocks to sell into the strength.
Two of the weakest spots right now are metals and energy. I use the SPDR S&P Metals and Mining (NYSEARCA:XME), and the Energy Select Sector SPDR (NYSEARCA:XLE) to track both areas. Unlike, say, the industrial sector, which only fell a couple percent from its peak during the recent market misstep, XME and XLE were demolished.
The former fell 16.7% from its December high, and the latter dropped 15.8%. Support levels were smashed and now loom large as potential resistance zones. And that has me eyeing which stocks in each fund are worth shorting.
Here are three of the most vulnerable.
Stocks to Sell: Alcoa (AA)
To say Alcoa (NYSE:AA) has been decimated would be an understatement. AA stock has fallen 89% from its highs, and with the latest downturn now sits below its 2009 low. It’s as if the 11-year bull market in stocks never happened. In 2016 Alcoa shares saw a one-for-three reverse split, which boosted its share price. Unfortunately, the fundamentals have deteriorated, plunging AA back into the abyss.
We’re now going on four consecutive earnings announcements with negative earnings per share. The distribution following January’s report was relentless, with Alcoa stock falling 11 days in a row. An oversold bounce finally emerged, and AA has rallied for three days straight and is gapping higher this morning.
This creates a lower-risk entry for bears looking to game the downtrend.
The Trade: Once AA breaks a previous day’s low, buy April $17 puts or the April $17/$14 put spread.
Exxon Mobil (XOM)
Energy stocks have been abandoned in favor of the tech sector and other industries offering better growth potential. Plunging oil prices certainly haven’t helped matters. The latest downturn in companies like Exxon Mobil (NYSE:XOM) has been particularly steep.
The oil giant now is probing its lowest levels since 2010. The price reduction is so extreme that Exxon’s dividend yield has risen to a juicy 5.8%. With its long history of failed rallies, it’s hard to see how yesterday’s bounce will prove anything more than a selling opportunity. The 20-day, 50-day and 200-day moving averages are all cruising lower, and a major old support zone stands atop the stock near $66 and should prove formidable resistance.
And that’s if we even get there. Buyers’ resolve is being tested as energy continues to move into the red. Consider using a break of a prior day’s low as your trigger. Option premiums are expensive, so I prefer spreads over buying puts outright.
The Trade: Buy the April $62.50/$57.50 put spread.
United Parcel Service (UPS)
United Parcel Services (NYSE:UPS) rounds out our trio of stocks to sell with a clear bear retracement pattern. While it hasn’t suffered as dramatic a downturn as its predecessors in recent years, last month’s post-earnings whack was massive. The major support break and volume surge have me betting rallies will be short-lived.
The selling pressure is simply too intense.
I think yesterday’s ramp offers a chance to deploy bearish trades. Implied volatility is high enough to make bear call spreads interesting. They offer a higher probability of profit than buying puts or shorting the stock, so we can profit even if UPS stock treads water for a few weeks.
The Trade: Sell the March $110/$115 bear call spread for around 70 cents.
As of this writing, Tyler Craig held bearish positions in UPS. For a free trial to the best trading community on the planet and Tyler’s current home, click here!