These days, nothing it seems can spook Wall Street for more than a day or two. And there are some good reasons to be bullish. But in a market made up of novel coronavirus challenges and social distancing, it’s time to hedge the cheer with three well-positioned stocks to short.
I suppose investors are free to be relieved that President Donald Trump is like the “Man of Steel” after recently flying out of Walter Reed. They’re also OK to think stalled stimulus talks are destined to get done — and sooner rather than later. Those are simply opinions, though. What is more certain, however, are Federal Reserve support and a classic corrective September spook accompanied by a key follow-through day signal. These are both unequivocally worth respecting.
However, not every stock is Costco (NASDAQ:COST), Amazon (NASDAQ:AMZN), Zoom Video (NASDAQ:ZM) or Roku (NASDAQ:ROKU). Most companies simply are not benefiting from the pandemic, nor are they well-positioned for an extended lockdown. Remember, a second wave looks to ripple through everyday life for most of us.
That said, the three stocks to short are:
The hope is in 2021 we can begin the process of making America great again, more normal or at least saner than today. There are no guarantees, though. That is why, right now, it is time to stay away from these three stocks to short.
Stocks to Short: Carnival (CCL)
The first of our stocks to short is embattled cruise line operator Carnival. In situations like a heavily underwater CCL, I’m typically a firm believer in anticipating better-than-feared responses to seemingly bad news. But this week’s selloff on data breach news, cruise cancellations and word peer Royal Caribbean (NYSE:RCL) is seeking to raise $1 billion instead found investors willingly jumping ship. Sometimes, bad is simply bad.
Technically, shares are anything but shipshape. And with CCL stock decisively taking out emerging trendline support, forming a tenuous lower-high pattern and canary-like stochastics positioning, the price action needs to be respected as a stock to short.
My take is Carnival shares could blow past their Covid-19 low with bankruptcy risks increasingly back on the table. For less than 10% stock risk and about six months to book passage as a bear, I’m favoring the April $10 put for exposure.
The next stock to short is Disney. At the end of the day, what the diversified entertainment giant offers is non-essential. And shares are looking like a short, both off and on the price chart.
Disney’s theme parks, movies and ESPN unit are all exposed to much greater risks than most businesses. Theme parks feature high-touch environments and often requiring air travel. Disney also has to struggle with ever-costly film production and the difficulties of rolling out blockbuster cinema to the masses in the new normal. Even major league sports, which joyfully have been making a comeback of sorts, are still not exactly hitting it out of the park. Worse, professional and collegiate sports are always at risk of getting benched again.
Technically, the House of Mouse also looks like a bearish setup on the price chart. A topping candle on the monthly view challenged and failed to clear DIS stock’s 76% retracement level. Price confirmation was narrowly received earlier this month, but shares have rallied modestly. I’m thinking it’s a bull trap.
What I’d like to see is a second wave of pressure take shares modestly beneath October’s low. I’m looking for Disney’s longstanding uptrend line to be broken for a second time following March’s Covid-19 failure. Also a plus, that type of price action should allow a neutral stochastics setup to turn bearish. When that day does arrive, I’d suggest purchasing an intermediate-term bearish vertical like the March $110/$95 put combination. Admission may very well cost more, but it should be worth the price.
Stocks to Short: American Airlines (AAL)
The last of our stocks to short is American Airlines. Unlike Carnival’s business or Disney’s for that matter, airlines are an essential service. However, there will be casualties. Warren Buffett famously believes that’s the case. And one name in much worse financial shape than peers like Delta (NYSE:DAL) or Southwest Airlines (NYSE:LUV), and less likely to weather a prolonged economic storm, is AAL stock.
Technically, AAL has struggled a bit more than other airliners. But I’m looking for a full-fledged failure of this stock’s March low in 2021. Here, and like Disney, I’d stress waiting for a bit of price confirmation before entering into a short. My thoughts are that failure of an inside candlestick pattern that formed after June’s highly volatile hangman formation should do the trick.
For positioning, a bearish put spread also looks great for investors that appreciate limiting and reducing risk.
On the date of publication, Chris Tyler does not hold, directly or indirectly, positions in any securities mentioned in this article.
The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CATandStockTwits.