The Santa Claus rally is back on, baby! Omicron variant fears are finally fading, and investors have returned to the business of buying in a big way. Tuesday’s rally shattered resistance, and singlehandedly turned the price trend back up for the S&P 500 and Nasdaq. But before you go rushing in to buy everything willy-nilly, realize some stock charts remain broken. So today, I’m highlighting three dead-cat bounce stocks to sell.
Otherwise known as a sucker’s rally, the dead-cat bounce refers to a stock that rallies a few days in the context of an overall downtrend.
Since a trend in motion tends to stay in motion, rallies are always prone to failure in a downtrend. As robust as this week’s jump was, it was unable to rescue the sinking ship of some of the market’s worst performers.
I’ve scoured my watchlist for the bounces that look the most suspect, and here are three worthy ones:
If you want to bet against the tailwind of year-end seasonality, or if you simply think Santa will pass by today’s candidates, then bear trades are on the table.
Stocks to Sell: American International Group (AIG)
American International Group finds itself in a short-term downtrend beneath the falling 20-day and 50-day moving averages. Though buyers deserve credit for defending last week’s test of the 200-day, the rebound has been lackluster.
To wit, while yesterday saw stocks soaring, AIG stock ended with a weak doji candle at potential resistance.
This morning prices are down about 0.50%, showing further weakness. If you think the downtrend continues, a trip back to the 200-day is likely. To capitalize, consider buying put spreads.
The Trade: Buy the January $55/$50 bear put for $1.65.
You’re risking $1.65 for the potential to make $3.35 if AIG sits below $50 at expiration.
Cummins (CMI)
Weakness isn’t a new phenomenon for Cummins. The industrial company peaked in March and has been sliding since. At last week’s lows, the stock had fallen 25% from its highs. Every bounce along the way ultimately failed, and I see no reason why we shouldn’t assume the current one will as well.
All the multi-day rally has done is return prices to the falling 20-day moving average and a significant old support pivot at $220. If the principle of polarity holds, this should become a new resistance zone. At any rate, it offers a low-risk entry point for new bears.
The minimal cost of a put spread and its favorable reward to risk ratio make it a good strategy here.
The Trade: Buy the January $220/$210 for $3.45.
The max loss is $3.45, and the max gain is $6.55.
Stocks to Sell: Dutch Bros Inc (BROS)
Dutch Bros Inc rounds out today’s trio of stocks to sell. It’s a relatively new addition to the public landscape and only has three months of price data available.
Elevated volatility has accompanied its swings, as is common with recent IPOs. Regardless, a daily downtrend has taken root over the past six weeks, and prices are below both the 50-day and 20-day moving averages. We carved out a lower low on Monday and have rallied two days since.
There’s a chance that was the low of the trend, and we rip higher here, but I’m willing to give the downtrend the benefit of the doubt. That said, it’s essential to wait for confirmation, such as prices falling below today’s low ($49.59). If that happens, traders have a green light for bearish trades.
The high volatility makes building a spread a must. Buying puts is too expensive. Once again, we’re going with a put vertical.
The Trade: Buy the January $50/$45 put spread for $2.05.
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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