MasterCard (NYSE:MA) just notched a record high after blasting through a long-term resistance zone. But you don’t have to chase the financial giant at the highs. Yesterday’s rug-pull in risk assets brought MA stock back to a lower-risk entry point. It’s a gift I suggest you open. Today’s article will show you how.
Rising interest rates once again took center stage on Thursday. Spooked traders took one look at the 10-year yield launching to a fresh 52-week high and decided to jettison stocks from their portfolios. The selling was particularly nasty in the technology sector. Energy had its own issues with crude oil plunging more than 8%.
Do you know who didn’t get caught up in the drama? Financials. They remained the lone sector in the green. Sure, they didn’t close at their highs, but ending up 0.52% when the rest of the market is getting destroyed is a massive win.
Twin Tailwinds for Financials
While rising rates hamper high multiple, growth stocks, it’s a boon for banks. More specifically, when long-term rates rise while short-term rates remain pinned at zero, it boosts their bottom line.
As a result, much of the cash flowing out of technology is moving into financials. And, in case you didn’t know, stocks move somewhat sympathetically with their sector. What’s good for financials is good for MasterCard.
As if the rising rates theme wasn’t compelling enough, there’s also the overarching reopening theme that works to MA stock’s benefit. Tens of millions of freshly vaccinated consumers are ready to be unleashed on the economy. A broad swath of them just received the largest round of stimulus checks yet.
Those who have homes are sitting on a great deal more equity than only a few years prior. According to CoreLogic, national homeowner equity increased by $1.5 trillion or 16.2% in Q4 2020 versus the year-ago quarter. This all points toward more spending and thus more profits for the likes of MasterCard.
MA Stock Chart
A bullish price chart buttresses the rock-solid fundamental case. Just last week, MasterCard breached the ceiling, which had halted each advance over the past six months. The zone between $360 and $365 had been where rallies go to die. Until March 8, that is. Buyers swarmed to deliver a convincing accumulation day. If you missed the breakout day, you either had to chase at higher prices or wait for a pullback. For those that took the second route, the patience has finally paid off.
With Thursday’s tumble, MA stock retreated to the rising 20-day moving average. It’s also now testing the old breakout zone, which should have a good chance of turning into new support. That would be the ideal scenario, but the longer-term uptrend tells me this dip is a buy regardless of how low it goes.
Given the significant size of yesterday’s drop, it would be ideal to see some type of reversal candle form before pulling the trigger.
The Trade
If the higher price of $367 has you skittish, then try using options instead. The implied volatility rank sits at a lowly 6.15%, making long premium strategies my trade of choice. Long calls would be in play if the stock were cheaper, but at the current cost, bull calls are better.
The Trade: Buy the May $380/$390 call vertical for around $3.40.
The max loss is limited to your original cost of $3.40 and will be lost if MA stock sits below $380 at expiration. The max gain is $6.60 and will be captured if MA rises above $390 by expiration.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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