For weeks, smaller stocks have lain dormant and remained off of investors’ lists of stocks to buy. The relative weakness versus high-flying tech companies has been stark. While the Nasdaq has been carving out record highs day after day, the Russell 2000 Index has been struggling under a domestic economy that continues to be hampered by the novel coronavirus.
But all of that changed on Wednesday. While the tech sector was hovering near unchanged, small-cap stocks were up as much as 4%. The sudden shift to outperformance was driven in large part by positive news surrounding Moderna (NASDAQ:MRNA) vaccine results.
Yesterday’s leaderboard saw huge gains out of airlines, cruise lines, casinos and a host of other industries that have been hardest hit during the pandemic. Here were three of the best smaller stocks to consider:
Today we’re taking a closer look at their upside reversals and laying out what makes them ideal stocks to buy.
Smaller Stocks to Buy: Delta Airlines (DAL)
The price action in Delta Airlines has given buyers zero reasons to get involved for the past month. Swing highs have been getting progressively lower, the 20-day moving average has been trending down, and just a few days ago, we were below the 50-day moving average. At the same time, accumulation days, which littered its chart throughout May and the early part of June, have been utterly absent.
Fortunately, Wednesday’s rally changed all that. The 10% rip pulled DAL stock back above its averages. High volume accompanied the pop, suggesting institutions were re-entering the stock. We also blasted through a resistance pivot, officially reversing the short-term trend higher.
While we may not blast off as aggressively as the June explosion, the path of least resistance has at least shifted from down to up. And that has me eyeing neutral to bullish trade ideas.
The Trade: Sell the Aug $24 put for around $1.10.
SeaWorld Entertainment (SEAS)
SeaWorld shares’ flight path has followed that of DAL stock. In fact, all of the distressed industries represented by today’s picks have boasted a strong correlation, rising and falling based on investor sentiment surrounding the economy reopening. Like Delta, SEAS stock was trending lower for the past month, stuck beneath a falling 20-day moving average, and recently, the 50-day.
Yesterday’s 15% pole vault carried the small-cap stock back above a horizontal resistance level at $16.31. It also caused the formation of a higher pivot low. Although subtle, the improving price action does give room for optimism where previously there was none. SEAS stock is down 3.6% this morning, but is so far holding above old resistance. That places it among the most promising stocks to buy soon.
I’m favoring higher probability trades that could profit from sideways action in part because I think the stocks mentioned today aren’t entirely out of the woods. I much prefer selling puts to buying calls, mainly because of the high options premiums.
The Trade: Sell the Aug $15 put for $1.40.
MGM Resorts (MGM)
MGM Resorts has a stock chart that mirrors its predecessors. Yesterday’s rally was the game changer and it’s the sole reason why placing it among this list of stocks to buy. Rather than rehash the promising turnaround in technicals already mentioned, let’s talk more about why naked puts are a good fit for today’s trio or picks.
By selling puts, you obligate yourself to buy 100 shares of stock for each contract. In exchange for making this promise, however, you get paid a premium. That payment represents your max reward if the put ends up expiring worthless. Selling puts on stocks you want to own creates a potential win-win. If the put expires worthless, then you pocket a nice reward. And if the stock drops, pushing the put in-the-money, then you get to buy shares of a stock at a discount to their current price.
The Trade: Sell the Aug $15 put for 80 cents.
If MGM stock sits above $15 at expiration, then you’ll capture the $80 reward per contract. If it falls below $15, then you can either buy to close the put to minimize losses or allow assignment and buy 100 shares for $14.20.
Tyler Craig is a member of the Chartered Market Technician’s Association and holds the CMT designation. His entire adult life has been dedicated to helping individuals learn how to trade as an elite instructor and personal mentor. To join his team and the best trading community on the planet, click here. At the time of this writing, Tyler didn’t hold positions in any of the aforementioned securities.