With Christmas around the corner, talk of the Santa Claus rally is making the rounds. The seasonal pattern covers the last five trading sessions of the year and the first two of the New Year. According to the Stock Traders Almanac, equities historically have a strong tailwind over these seven days. So today, I want to share three stocks to buy if you’re willing to wager old Saint Nick delivers again for 2021.
Rather than throw out any old ticker symbol, I have two objectives in scanning for today’s targets.
First, I wanted a sound technical pattern supporting bulls.
Second, I wanted to make a diversified list offering three distinct ways to play. The three choices below check both boxes and offer compelling setups for the days ahead.
After explaining more of my rationale for each pick, I’ll pitch an options trade idea.
Stocks to Buy for the Santa Claus Rally: Walt Disney Co (DIS)
At last month’s lows, Walt Disney had fallen 30% from its peak. That places it deep into bear market territory, even as the S&P 500 sits a stone’s throw from record highs. Getting the chance to buy a blue-chip company like Disney at such a steep discount is rare. Thus, I’ve been looking for any excuse to put some money to work. With Tuesday’s 3% jump, I think we now have a compelling reason.
We formed the first higher pivot low since DIS stock got destroyed on earnings. This confirms buyers are finally circling the wagons, and the downtrend could end. I like buying shares here and keeping the door open to adding more if this bottom fails. The other way you could play is by purchasing call spreads.
The Trade: Buy the February $150/$160 bull call spread for $4.
iShares Russell 2000 ETF (IWM)
The selling over the past month has been widespread, but small-caps have been hit particularly hard. IWM fell 15% from its highs, more than tripling the losses of the S&P 500. But with significant support holding at $210 and some potential holiday cheer on the horizon, IWM is potentially poised for a stronger snap-back than large-caps.
And, if the rebound fails to materialize, the primary support zone at $210 provides an easy and obvious stop-out point to mitigate your risk. However, since there’s still significant overhead resistance in the form of every moving average and previous pivot highs, I prefer selling put spreads over buying calls here.
The Trade: Sell the January $209/$204 bull put spread for 90 cents.
Stocks to Buy for the Santa Claus Rally: Apple (AAPL)
For our final submission of the top stocks to buy, we’re going with the biggest of them all: Apple. While the S&P 500 has been cracking key support zones and major moving averages, AAPL stock has quietly climbed to a new high. Since then, a retracement has formed, returning prices to the rising 20-day moving average. Tuesday’s 1+% pop suggests bulls are buying the dip.
Over the past two months, the relative strength we’ve seen has been extremely impressive. It appears Apple has safe-haven status and will likely continue to hold firm even if Santa doesn’t show up.
Consider buying shares here or the following call spread:
The Trade: Buy the January $170/$180 bull call spread for $4.30.
On the date of publication, Tyler Craig was LONG DIS & IWM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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