Traders are facing a bifurcated market this week, and it’s creating some interesting trade setups on both sides of the ledger. On the one hand, growth stocks, led by the tech sector, are powering to new highs. On the other hand, value stocks, led by the financial and industrial sectors, are rolling over. For today’s top stock trades, we’re following the latter trend by spotlighting three bearish ideas.
If you’re looking for a culprit for the divergence, cast an eye toward interest rates.
Ever since the 10-year yield started to cool, investors have been favoring growth areas of the market. In March, the 10-year peaked at 1.76%. Now, it’s at 1.48%.
More importantly, along the way, the short-term and intermediate-term trends have turned lower. As a result, rates are now submerged beneath a falling 20-day and 50-day moving average.
I scanned the weakest areas of the market and found the following three bear plays:
Let’s take a closer look at each chart.
Top Stock Trades: Mosaic (MOS)
First up is Mosaic, which calls the basic materials sector home. Anything related to materials and commodities took it on the chin after the Fed meeting, and MOS stock was no exception. This was a $6 stock last March, so when sellers sink their teeth into it, you know this ticker can crumble.
With the recent rollover, prices breached the 50-day and 20-day moving averages and are now 21% off their highs. Last week’s rebound was weak and lacked conviction. It’s the type of dead-cat bounce that I like to short.
Monday’s nearly 3% decline is signaling sellers are active to start the week. I like using $27.50 as the next downside target.
The Trade: Buy the August $32/$27 put spread for $2.25.
The risk is $2.25, and the potential reward is $2.75.
Caterpillar (CAT)
Industrials joined basic materials in the dog house this month. And it sure hasn’t helped stocks like Caterpillar, which is next in our list of top stock trades. The construction giant dropped for two straight weeks amid heavy distribution. It was the largest drawdown we’ve seen since its recovery began in earnest last May. From peak to trough, CAT stock fell 17%.
This transpired, mind you, while the S&P 500 dipped less than 3%.
Rallies following such a dramatic downturn are always suspect. So it should come as no surprise that last week’s snapback ended with a bearish reversal candle near old support zones.
Monday’s follow-through wasn’t as convincing as I’d like, particularly with the late-day rally pushing prices into positive territory. Nonetheless, CAT remains vulnerable to more downside until we reclaim the high side of the 20-day moving average.
The Trade: Buy the August $210/$200 put spread for $3.20.
The risk is $3.20, and the potential reward is $6.80.
Top Stock Trades: Vipshop Holdings (VIPS)
Our final bear play for this week’s top stock trades takes us far overseas. Vipshop Holdings is an online discount retailer for brands in China. Its share price has the type of volatility that momentum traders love. When you’re on the right side of it, profits arrive swiftly at your doorstep. But you better watch out when the tide turns.
With the dramatic reversal of fortune that struck in late March, we’ve seen prices almost roundtrip to the October lows. VIPS offered many clean breakout trades for bulls on the way up. And it’s done the same for bears on the way back down. Currently, we have a retracement setup that looks poised to roll over.
If you think the downtrend continues, watch for a break below Monday’s low to trigger you in.
The Trade: Buy the August $20/$15 put spread for $2.
The risk is $2, and the potential reward is $3.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
For a free trial to the best trading community on the planet and Tyler’s current home, click here!
