The drumbeat of red-hot inflation prints continued last week, with the latest consumer price data revealing the highest annual rise since February 1982. The 7.5% surge in prices sent ripples across risk assets, battering some but boosting others. Inflation stocks, or those that benefit from rising prices, continue to attract followers as investors look for ways to game the strengthening trend.
From a sector perspective, energy and basic materials have done well during inflationary environments. Climbing commodity prices provide a tailwind for companies in both sectors. While oil drives energy stocks, the cost of copper, steel, aluminum and the like supports material companies. The technical posture of both sector charts also makes them stand above the rest.
Here are three stocks that should continue to benefit from inflation fears:
Their charts offer relative strength and powerful uptrends. So let’s take a closer look and build an options trade to profit.
Inflation Stocks: Freeport McMoran (FCX)
Copper prices scored a rousing breakout last Wednesday. The pop brought fresh buyers into Freeport-McMoran, returning prices to the old resistance zone at $46.
Many traders use FCX as a proxy for copper in the stock market due to the strong correlation between the two. Volume swelled during the ascent, adding legitimacy and increasing the likelihood it sticks. We’re above all major moving averages, so any weakness should get bought.
Because of its higher volatility and lower share price, FCX is a quality candidate for option selling strategies like naked puts. You can capture a high return on investment and a wide profit range.
The Trade: Sell the March $35 naked put for 55 cents.
Consider this a bet that FCX sits above $35 in a month. If it does, you’ll pocket the 55 cent credit.
Outside of the energy sector, very few stocks closed in the green on Friday. Alcoa was one of them. The aluminum giant rose to its highest level since 2008. Importantly, it’s broken out of a 13-year trading range, which says something about just how bullish sentiment is now.
The comeback from 2020 has been astounding. Alcoa was a single-digit stock at the March lows of that year. Now it’s rocketing to the moon.
Prices are extended in the short run and could see a pause or pullback to allow the 20-day moving average catch-up. I’d be a buyer in either case. Bull call spreads offer a limited risk path to profits.
The Trade: Buy the April $75/$85 call vertical spread for $3.25.
You’re risking $3.25 to make $6.75 if AA stock climbs to $85.
Inflation Stocks: Schlumberger (SLB)
The final pitch for today’s inflation stocks is Schlumberger. The oil services company has been riding high alongside oil.
The trend is up and to the right, climbing above all moving averages. Over the past three weeks, a high base pattern has formed, allowing overbought pressures to ease and an easy tradable setup to develop.
Watch for a breakout over $41 to complete the base and trigger the next advance has begun. It may seem like SLB stock has already risen a long way, but this used to be a $100-plus stock, so there’s plenty of gas in the tank if oil holds up.
The Trade: Buy the May $40/$47.50 bull call spread for $2.15.
The risk is $2.15, and the reward is $5.35.
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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