Big Gains From Sturm, Ruger & Company’s Reversion to the Mean

We've seen this pattern before

We are sure everyone has been watching the news about the unrest, protests and intermittent violence around the country. This is tragic for victims as well as the peaceful protesters. Unfortunately, the images of overturned cars, police in riot gear, and fires, gets a lot of news coverage.

The news coverage has triggered a pattern in gun stocks that we have seen several times before. We think we can take advantage of it with a bearish trade on Sturm, Ruger & Company, Inc. (NYSE:RGR).

Looking to NKE as an Example

In a lot of ways, this is similar to the strategy we have deployed a few times over the last two years on Nike (NASDAQ:NKE).  News coverage sometimes pushes NKE “too low,” and the stock often snaps back and reverts to the mean.

For example, in September of 2018, NKE released an advertisement featuring Colin Kaepernick, who had recently protested police violence by kneeling during the national anthem.

Further protests by NFL players and public statements by President Trump helped to keep this controversy in the public consciousness, which is probably why the NKE decision was unexpected. Subsequently, social media got flooded with images of burning Nike socks, shoes, and apparel, accompanied by posts of jeers and cheers directed at Nike or the boycotters.

Daily Chart of the Nike (NKE) — Chart Source: TradingView

As you can see in the chart above, NKE sold off at the start of the month. Investors got nervous about the boycotts, and they sold the stock.

But you’ll notice that the stock continued higher as the month went on. That’s because the Kaepernick commercial and subsequent boycotts had little to do with NKE’s solid fundamentals.

Protests and the potential election of Democrats to Congress or the White House tend to do the same thing to gun stocks. However, the phenomenon moves in the opposite direction, temporarily pushing gun stocks higher before they drop again.

Consumers get nervous about protests or future gun restrictions, they buy a gun, and investors push the stocks higher. However, what is really happening is that future demand is just being pushed forward. In the short term, these buying frenzies don’t actually change the long-term forces of supply and demand for gun manufacturers.

RGR’s Jump Higher is Temporary

If you look at the chart below, you can see that after the protests over the weekend, RGR gapped higher. Just as we expected NKE to head higher in September 2018, we expect RGR to come back down when things start to settle.

Daily Chart of Sturm, Ruger & Company, Inc. (RGR) — Chart Source: TradingView

The stock’s previous support is just below $60, and we think that’s where the stock is destined to head. If traders select a strike closer to the top of the gap formed on June 1, they will get a better price on a bearish push option, and they will still net a decent profit when RGR falls.

We very rarely recommend an outright long call or put option, but this short-term opportunity on is too compelling to pass up.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/big-gains-from-sturm-ruger-companys-reversion-to-the-mean/.

©2020 InvestorPlace Media, LLC