Bonds dropped a little yesterday, which means interest rates are a little higher. The volatility in the bond market has probably been triggered by traders making adjustments before Federal Reserve Chair Jerome Powell gives a speech at the Jackson Hole economic symposium tomorrow.
While higher rates are great for banks, over the last few years, rising interest rates have been bad for tech stocks. The connection between the two isn’t extremely obvious, but it helps explain why the market was a little soft yesterday. Tech stocks pulled back slightly.
Rising interest rates are also a short-term drag on dividend payers like Coca-Cola Company (NYSE:KO), so if you’re holding shares of KO, we recommend using this as an entry opportunity to pull in some extra income by selling covered calls.
Consumers Still Want KO
From a fundamental perspective, we are still encouraged by stronger than expected consumer spending. According to the Conference Board, the consumer confidence index dropped in August, but that’s not entirely unexpected.
With expanded unemployment insurance gone and the state of the new expansion from President Trump’s administration uncertain, consumers were bound to feel less certain. We said as much at the end of July.
But as we’re often fond of saying: when times are good, people celebrate with a Coke, and when times are tough, people treat themselves to a coke.
The real struggle for KO is in the money it lost from closed restaurants. That situation though, has improved. All over the country, restaurants are opened at partial capacity, which is better than nothing.
And with a covered call trade, we don’t actually need KO to rise. It might even be better if it didn’t.
KO is Channeling Sideways (and That’s What We Want)
From a technical perspective, KO has strong support in the $46 range and may run into resistance near $48.50 where the stock reversed twice in July and August. Right now, a continued channel looks to be the most likely short-term forecast for the stock.
Daily Chart of Coca-Cola Company (KO) — Chart Source: TradingView
Eventually, traders will want to leave the stock uncovered again to allow us to take advantage of a breakout from the current consolidation. However, at this point, we expect it may be another two weeks (when August’s labor report is released) before we have to prepare for that.
To get a good premium, you will need to look into September, but that doesn’t mean you can’t close the position early if you see the chance.
We recommend setting a strike just above resistance at $48.50. That way you give the stock a little room to rise in the short term.
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.
