The market has made a strong comeback this week, which is enough to force investors to question whether stocks have come too far, too fast. However, amid the hype, three doggish Dow Jones stocks are demonstrating legitimate promise today.
If nothing else, it would be hard to deny the market’s resilience with the Dow Jones Industrial Average bouncing back sharply from a dizzying correction last week. Since Monday, prior Federal Reserve-induced FOMC jeers and second-wave novel coronavirus fears have given way to burly bargain-hunting and cheers on the back of J. Powell & Co.’s corporate bond rescue. To be certain though, it’s still a market made up of stocks.
While the Dow has scratched its way back to within 8% of making index investors whole again, many stocks haven’t followed suite. Moreover, some Dow Jones stocks entered what was a record breaking 2019 as attractive investments due to their inability to play ball and participate in the game of ever higher valuations. The top ten contenders are known as the Dogs of the Dow.
Stocks correct all the time, even in healthy markets. And when it happens to blue-chips that offer dividends to investors and those income distributions grow even larger than normal, the Dogs of the Dow is a popular 12-month, buy-and-hold strategy for profiting from the divergent price behavior.
The Dogs strategy won’t guarantee investors have the next Apple (NASDAQ:AAPL) or Microsoft (NASDAQ:MSFT) in their portfolio for obvious reasons. But historically this method of investing has beaten the returns offered by the Dow Jones. Maybe more amazing, the out-performance has even paid off through a combination of income and stock gains over the course of a record breaking bull market since the low of the 2009 financial crisis.
A bit more than halfway through 2020 and the majority of this year’s dogs are lagging a still underwater Dow. Truthfully, I’d be afraid to touch a couple of today’s “canines” with a ten foot stick. But for the following three names, the price charts in conjunction with protective options hedging may just prove to an investor’s best friend:
Let’s examine what makes of these Dow Jones stocks stand out today.
Dow Jones Stocks: IBM (IBM)
Source: Charts by TradingView
When investors were eyeing the dogs’ strategy at the beginning of the year, they may have been licking their chops over IBM’s 4.79% income stream. Now it’s a slightly more tempting annualized dividend of 5.25%. And technically, today’s buyers look to be in a strong starting position for future capital gains.
The coronavirus-induced market correction resulted in shares of IBM putting together a well-supported and bullishly diverging triple bottom pattern. With the pattern being four years in-the-making and shares offering investors the opportunity to buy in near April’s inside candlestick confirmation, it’s time to purchase this Dow Jones stock today.
To make IBM’s prospects even stronger, I’d go with an open-ended variation on a traditional collar, which uses a bear put spread, rather than a long put for protection. It’s riskier on paper, but the price and placement of the combination look worth the increased downside exposure. Specifically, buying the Aug $115 / $100 bear put spread and selling the Aug $135 call for a slight discount of around 0.35% to 0.40% versus purchasing a standalone stock position looks attractive.
Source: Charts by TradingView
Verizon is the next of the stand out Dow Jones stocks to purchase right now. The telecommunications giant should have income investors’ attention as its yield has inched its way marginally higher from 4.01% to 4.32% since the beginning of the year. But this blue-chip is also noteworthy for technical trend traders as well.
At its worst in March during the market’s Covid-19 correction, Verizon managed to confirm a slightly steeper uptrend of around five years. It’s bullish. And set inside of its very well-constructed up-channel that’s formed since the financial crisis low in 2009, trend traders should be even more upbeat on this blue-chip.
Shares confirmed the March pivot and doji candlestick low in April. And similar to IBM, this Dow Jones stock is still stationed near its signal price, while also being backed by a bullish stochastics crossover.
I’d recommend the same type of open-ended collar for VZ stock. Here, buying the Aug $52.50 / $45 put spread, selling the Aug $60 call looks interesting. Along with shares, the play will cost about ten cents more than a simple stock position. That may have income investors stopping in their tracks. Still, we’re talking about a dime and the partial protective value afforded by this technically, well-placed vertical looks well worth the cost of entry.
Source: Charts by TradingView
The last of our three Dow Jones stocks is Caterpillar. Okay, you got me. Officially, this selection was just more doggish than an actual dog in 2019. Its weak performance landed it in the No. 11 position of high-yielders in the Dow with a 2.79% dividend. That was narrowly behind Coca-Cola’s (NYSE:KO) payout of 2.89%. But today, and with an improved income stream to start of 3.23% in hand, CAT stock looks set to learn a new trick on the price chart called rallying.
Technically, Caterpillar’s March low appears to be setting the stage for a larger, slightly ill-formed ‘W’ or double-bottom corrective base. The recent bottoming hammer candlestick successfully challenged the former highs and two Fibonacci levels dating back to key lows from 2009 and 2016. It looks great and the pattern could help shares rally towards new highs in the second half of 2020.
As with our other dogs to buy, some weakness the past two months is allowing this Dow Jones stock to be purchased near the initial pattern confirmation price. Likewise, stochastics is supporting a buy entry right now.
To go long in CAT stock, another lower cost offshoot of the collar is favored. Once again, there is some open-ended downside risk with this variation. Still, paying a slight discount of about 0.40% for the Aug $115 / $95 put spread and short Aug $140 call combination looks good both fundamentally and techncially.
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.