The S&P 500 just wrapped up its best quarterly performance since 1998. The index surprised and delighted many by rising 20% during the past three months. Now the question is…what does the third quarter have in store?
We’re anticipating the third quarter is going to start in the same way the second quarter ended: with consolidation.
This gives us a great opportunity to generate some additional income by selling another covered call against Cisco Systems (NASDAQ:CSCO).
CSCO is likely to see strong underlying fundamental strength as the company benefits from increased 5G development and spending around the world, but the growing concerns about COVID-19 in the United States are likely to temper bullish enthusiasm in the short term.
Action from the White House
One of the global leaders in the 5G race is Huawei, but you might recall the company has been under investigation for participating in Chinese espionage.
CSCO has been approached by the U.S. government about purchasing European 5G leaders Nokia (NYSE:NOK) or Ericsson (NASDAQ:ERIC), and though the company doesn’t seem interested, it does indicate the government’s interest in boosting these tech and communications companies.
CSCO has also benefited from its customers’ spending sprees at the start of the COVID-19 pandemic. The company’s video conferencing service WebEx has become more popular because of its security features, something Zoom Communications, Inc. (NASDAQ:ZM) still struggles with.
But that bullish rise may not last. Companies are still reopening even as cases rise, and those that aren’t won’t be buying any new equipment. CSCO’s sales surge was nice, but it probably isn’t sustainable.
It’s also important to remember that investors may not have an appetite for risk right now.
Consolidating for the Rest of July
Just like the S&P 500, CSCO hit its recent high in early June before pulling back into its current consolidation range. The stock has been bouncing back and forth between resistance at $48 and support at $44, and we expect it is going to continue to do so in July.
Daily Chart of Cisco Systems (CSCO) — Chart Source: TradingView
We would recommend choosing a strike price just above the $48 support level because it is always better to have a buffer in the event of a rise.
Because CSCO reports earnings on Aug. 12, we wouldn’t recommend holding a covered call longer than a month. If you, like us, are looking to generate some income on your shares of CSCO, we recommend looking at options that expire in late July.
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.