It seems the “fear of missing out” has taken over among investors who continue to bid the market ever higher. To be fair, it does look like we’ll be able to call this a V-shaped recovery in the stock market.
Regular readers will remember my trading mantra: Don’t fight the Fed. The Federal Reserve is still pumping trillions of dollars into the economy, and the other global central banks are doing the same.
While I think we may be approaching overbought territory, the best recommendation I can give now is a bullish trade on Kohl’s Corporation (NYSE:KSS).
The Liquidity Takes Effect
The S&P 500 had its best 50-day rally ever, returning 37.7%. This is a very powerful rally, and the biggest factor is the actions of the Fed.
If you look at the chart of the U.S. Dollar Index (NYSEARCA:DXY) below, you can see one example of the quantitative easing’s effect.
Daily Chart of U.S. Dollar Index (DXY) — Chart Source: TradingView
As investors realized how much additional liquidity was rushing into the system, the dollar started to break down this week.
There was a rush into U.S. dollars back in March as investors sold off other assets. That move was clearly overdone, and the dollar declined and then consolidated throughout April and May.
Over the last two weeks, the dollar has really started to roll over. A weaker dollar is generally good for many assets priced in dollars, and it’s also a good sign that investors are becoming less concerned about the global economy.
So, we know why the market is bullish, but why buy a bullish call option on KSS?
To begin with, its important to consider this morning’s jobs report from the Bureau of Labor Statistics. Instead of losing jobs, the economy added over two million. That may be good for retailers like KSS, which are also going to benefit from a reopening economy.
But with KSS specifically, remember that JCPenny (NYSE:JCPNQ), one of its rivals in the retail space, is going bankrupt and shuttering stores. People aren’t exactly clamoring to fill that void with a new department store, so KSS can claim some of that market share.
Daily Chart of Kohl’s Corporation (KSS) — Chart Source: TradingView
And if you look at the stock’s chart above, you can see that it has been gradually heading higher since April, crossing above its 50-day moving average in May.
If KSS can break above resistance at the bottom of the gap it formed in March, which is where it is currently sitting, there’s no reason it can’t break above up-trending resistance and head for $30 per share.
Buy to open the Kohl’s Corporation (KSS) Oct. 16th $32.50 Calls (KSS201016C00032500) at $1.50 or lower.
InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.