The seasonal winds of September are spinning up. And it’s getting ugly out there. Not every sector is suffering equally, but Tuesday’s decline affected nearly every nook and cranny. Industrial stocks look particularly vulnerable to further downside. To warn against their weakness, I’m highlighting three of the worst stocks to sell.
Last week’s breach of the 50-day moving average in the Industrial Sector ETF (NYSEARCA:XLI) was the tell. Ever since then, it’s been a straight shot lower. Momentum surged on Tuesday, reflecting increased selling aggression. It’s become difficult to scoff at seasonal concerns. Now we have deteriorating technicals to tussle with.
If you’re inclined to play with bears, I’ve scoured the most liquid industrial companies and discovered three candidates:
After chronicling the recent deterioration, I’ll share a smart options trade to profit.
Industrial Stocks to Sell: Caterpillar (CAT)
Caterpillar finds itself on the brink of a significant support break. A push lower here, and we could see momentum accelerate as traders with stops placed below this zone head for the hills. What’s worse, CAT stock is already almost 20% off its highs and finds itself submerged beneath all major moving averages.
While it doesn’t mean Caterpillar can’t recover at some point, it does mean there’s now a significant amount of overhead supply. We are very much in a sell-the-rallies type of environment, so all upswings should be viewed with a healthy dose of skepticism.
If you think a push to $190 could be in the cards, here’s a way to profit from it.
The Trade: Buy the October $200/$190 put vertical for $2.90.
The max loss is $2.90, and the max gain is $7.10.To capture the entire profit, CAT must sit below $190 at expiration.
The bear case for Boeing has grown over the past six months. And, if I’m honest, it’s been a garbage stock to trade due to the frequent gaps and high volatility. But I’m encouraged by the recent price action. Price action has stabilized, and the trend has been more consistently bearish. We’re now nestled below the 20-day, 50-day, and 200-day moving averages, and the last two rally attempts were quickly rejected.
Over the past week, a low base formed, and Tuesday’s drop brings us within striking distance of a support break. If it happens, I like banking on the move to $200. Similar to CAT, I like buying put spreads here.
The Trade: Buy the October $210/$200 put spread for $3.50.
The max loss is $3.50, and the max gain is $6.50. To pocket the gain, we need BA stock to fall below $200 by expiration.
Industrial Stocks to Sell: Dow Inc (DOW)
The pattern across today’s industrial stocks to sell is very consistent. Dow shares look similar to both CAT and BA. This fact speaks to the generally strong correlation that a stock has with its sector. It also suggests that investors dislike large-cap industrials equally right now. Until this changes, bullish trades are best deployed elsewhere. But, of course, if you think the recent trend continues, then DOW stock will see lower prices.
It’s cracking $60 support as I type, and $57 looks like the logical next target.
Let’s go with a straight put purchase to mix things up and give you a more aggressive alternative.
The Trade: Buy the October $60 put for $2.20
The risk is limited to the original purchase price of $2.20, and the reward is unlimited.
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.
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