Tuesday’s bounce was short lived. After dropping yesterday, it looks like the major indexes will open lower again today.
Traders are still trying to price in the economic impact of the COVID-19 outbreak, which has become more complicated with the collapse in oil prices on Monday. To add to the long list of uncertainties, President Trump and Congress gave mixed signals about the plans for an economic stimulus.
More details could help settle the market temporarily, but it doesn’t look like investors will get clarity anytime soon.
To add some protection to your portfolio, we recommend opening a short position in Limited Brands (NYSE:LB), which should continue to fall as consumers restrict their travel and shopping during the outbreak.
LB Doesn’t Own Strong Brands
Being the owner of Bath & Body Works and Victoria’s Secret is fine when consumers are looking to spend money, but it’s hard to make a case for LB’s different segments in the middle of this outbreak.
If market conditions worsen, we would expect LB’s relatively poor fundamentals to drive it lower. When it reported earnings in February, LB topped its sales expectations for the fourth quarter of 2019. However, those sales fell by 1% from the same time last year.
And LB is planning on taking Victoria’s Secret, one of its two major brands, private soon.
Investors looking at retail stocks for value could push into less troubled, higher quality companies like Target (NYSE:TGT). With its declining profit trends and compressed margins, LB is much less reliable that other large caps.
Breaking Below Support and Heading For $16
LB broke below support at around $20 per share, which was at the bottom of the gap it formed in late January. In the chart below, you can see that the stock has support at around $17 per share and just below $16 per share.
Daily Chart of Limited Brands (LB) — Chart Source: TradingView
With all that is happening in the market, we think investors will push LB toward $16. With that in mind, shorting — or “selling to open” — LB common stock is a great way to add protection to your portfolio.
Our short-term price target is in the $16 range, and we would “buy back to close” the shares for a profit at that level.
If the stock drops as expected, we can buy to close the trade at any point for a profit. The profit available depends on the percentage of the price decline.
For example, if the trade is entered at $19.50 per share and closed near long-term support at $16.00 per share the returns would be 17.95%.
If the stock starts to rise, that will create a loss equal to the percentage of positive movement. We feel this is a much less likely outcome for the trade, but we should keep it in mind.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.