After yesterday, we can only assume that investors feel that the worst is over. The market seems convinced that, while a return to normalcy may take quite a while, the economy isn’t likely to get worse.
We remain a bit more cautious in our own outlook. As we said on Sunday, the market’s focus on a COVID-19 vaccine and reopening the economy can lead to big swings in the short term.
However, it’s never wise to “fight the tape,” or go against the action in the market, too aggressively.
Stocks gapped up yesterday to a new nine-week high, and although there have been some mixed results, market breadth still looks good. Investors have been piling into financial stocks, which has pulled some of the money flow from the tech sector.
As a result, we have a chance to open a new position in one of our favorite stocks: Microsoft (NASDAQ:MSFT).
Boosting Banks and Backing Out of Tech
Financial stocks led the way higher yesterday, with Citigroup (NYSE:C) rising 9% and JPMorgan (NYSE:JPM) rising by 7%. Both stocks continued rising in after-hours trading, and it looks like they will open higher this morning.
Meanwhile, tech stocks like MSFT dropped, and if you look at the chart below you can see that the tech sector and the financial sector, as represented by the Technology Select Sector SPDR Fund (NYSEARCA:XLK) and the Financial Select Sector SPDR Fund (NYSEARCA:XLF) respectively, moved opposite directions.
Daily Chart of the Technology Select Sector SPDR Fund (XLK) and the Financial Select Sector SPDR Fund (XLF) — Chart Source: TradingView
With the economy reopening and mortgage applications rising, banks seem to be the sector to beat in investors’ eyes.
But we expect investors to return to tech in the short term as expectations for more business spending and investment rise. MSFT has been one of our favorite positions over the last two years because its fundamental performance, reliable dividend income and core-business growth have continued to attract investors.
The Channel Continues
From a technical perspective, we don’t expect MSFT to roar past its prior highs just yet, but support at $180 is strong. If the stock channels between $180 and $190 before breaking higher, as we expect, traders should be in a good position to profit from time value erosion of any puts they sell.
Daily Chart of Microsoft (MSFT) — Chart Source: TradingView
With the stock continuing its sideways channel and volatility high, traders have a chance to sell a put write closer to MSFT’s current price for a much higher premium.
As always, we don’t recommend looking too far ahead when picking a strike price. We think mid-June expirations are best.
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.