The major averages continued to sell off as commodity prices took another hit yesterday.
Is this just taking some of the “froth” out of the market or are we due for a larger pullback?
We feel that a support bounce is the more likely scenario in the short term because the underlying fundamentals remain relatively stable.
For example, Friday’s labor report showed another 1.3 million jobs were added back to the economy. While that doesn’t make up for the losses earlier this year, that report shows there has been significant progress.
Because hiring is still positive, we feel that increasing our exposure to retail stocks is a good idea right now. It doesn’t hurt that premiums are inflated and that prices have cooled off a little.
But which stock do we pick? For us, Starbucks (NASDAQ:SBUX) is a clear pick when selling a put write.
Embracing Meatless Meat
Like so many companies, SBUX will soon incorporate more plant-based foods into its offerings. The company is exploring partnerships with Beyond Meat (NASDAQ:BYND), Impossible Foods and Oatly, though these additions are only in stores in Asia.
This isn’t necessarily ticker moving news. But it is a sign that SBUX is adapting to the new normal — part of which involves acknowledging that meatpacking plants have been vectors for disease.
That adaptation is the most important thing to remember.
For now, it seems the U.S. is through the worst of the economic issues related to COVID-19. Now companies are starting to adapt as things improve.
SBUX is still capable of making changes to its business model during the pandemic, and that means it will survive — even thrive — as things improve.
Jumping Back in at Support
In Strategic Trader, we closed a short-put position in SBUX recently to avoid getting caught at resistance. However, you will notice that after pulling back on Thursday and Friday last week, the stock was surprisingly defensive yesterday, which indicates very bullish relative strength.
Daily Chart of Starbucks (SBUX) — Chart Source: TradingView
From a technical perspective, the stock is beyond the resistance level we were monitoring, and we anticipate that price point acting as support through September. Newly formed support at $83.50 per share gives traders an excellent target for a strike price on a put write.
We think you can look at early October options for expiration dates offering decent premiums, but we wouldn’t recommend looking into mid-October because that gets closer to SBUX’s earnings date.
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.