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Dear Reader,
Stay tuned at the end of this issue for a special message from our newest options strategist, Jared Levy. He knows more about options trading than anyone I've ever met and recently shared with me the details of the strategy that allowed him to retire from Wall Street at the age of 23.
He will also share a trade you can make immediately to amplify a 25% move in a stock into 138% gains in the next two and a half months.
You won't want to miss this. If you want to jump to my interview with Jared now, click here.
Sincerely,
Frank Bermea
Publisher, Profitable Trading
| March 3, 2015
Chart Signals This Metals
Play is Set to Rally 25%
By John Kosar
All major U.S. stock indices closed lower last week following three weeks of higher closes, except for the small-cap Russell 2000, which was up just 0.1%. Despite last week's setback, the major indices are still in the black for 2015 and are being led by the tech-heavy Nasdaq 100 and Russell 2000, up 4.8% and 2.4% respectively. These indices typically lead the market higher during healthy bullish trends.
The two strongest sectors last week were consumer staples and consumer discretionary, the latter of which saw the largest weekly increase in sector bet-related investor assets according to my own ETF-based metric.
The Consumer Discretionary Select Sector SPDR ETF (NYSE: XLY) has outperformed the S&P 500 SPDR ETF (NYSE: SPY) by 3.3% since I identified positive asset flows in the sector on Jan. 5, and has outperformed by 4.9% since I first identified consumer discretionary as a potential buying opportunity in the Dec. 8 Market Outlook.
Seasonality Supports Recent Market Strength
In last week's report, I discussed an emerging breakout from a year of sideways investor indecision in the Russell 2000. A week earlier, I pointed out a similar breakout in the Nasdaq 100.
This week's first chart shows that 57 years of seasonality data support these breakouts and the continued market strength they imply. Seasonality is simply the statistical tendency of the price of a financial asset to rise or fall during certain times of the year.
The month of February has historically been the third weakest month of the year since 1957, but leads into the fourth and second seasonally strongest months of March and April. The red line, which plots the percentage of positive monthly closes during this period, indicates that the S&P 500 has historically posted a positive monthly close 66% of the time in March and 69% of the time in April.
Watch Dow Theory for Confirmation
One of the tenets of Dow Theory is that the Dow Jones Industrial Average and Dow Jones Transportation Average must confirm each other. I most recently mentioned Dow Theory in the Jan. 26 Market Outlook, stating that the market was leaning toward a bullish near-term resolution because a fresh closing low in the transports was not confirmed by a similar closing low in the industrials. The bellwether Dow industrials has subsequently risen by 2.6% through the end of last week.
A fresh closing high in the Dow industrials, set on Feb. 20 at 18,140, which exceeded the previous closing high of 18,038 on Dec. 29, has not yet been confirmed by a corresponding new closing high in the Dow transports.
As long as the transports do not establish a new closing high above 9,217, the sustainability of the broader market's recent strength will be suspect.
Buying Opportunity in Copper
In the Dec. 8 Market Outlook, I pointed out that commercial hedgers were holding a record bullish position in copper futures. I said it represented an aggressive bet by the smart money that copper futures were undervalued and headed higher over the intermediate term.
In last week's report, I pointed out that the materials sector has been the strongest sector of the S&P 500 year to date and said it suggested the rise in copper prices I was expecting may be getting some traction. Now, with copper prices up about 11% since the end of January, the buying opportunity I have been waiting for appears to have arrived.
One way for investors to participate in rising copper prices is via Freeport-McMoRan (NYSE: FCX) because of the miner's tight, stable positive correlation to copper prices since 1995.
FCX rose above both its $20.75 50-day moving average (minor trend proxy) and $20.94 Dec. 16 benchmark low last week.
The move through overhead resistance suggests that a significant bottom is in place at the late January lows and clears the way for a run to the next key level at $26.37, which is the stock's June 2013 low and 25% above last week's close.
Recent bullish breakouts from months of sideways investor indecision in a number of key U.S. stock indices, including the Nasdaq 100 and Russell 2000, are supported by 57 years of seasonality data that suggest the likelihood of more market strength into April.
I am looking for a close above 9,217 in the Dow transports to help confirm that the market's next leg higher is indeed under way.
Meanwhile, recently rising long-term interest rates and copper prices are also characteristic of a strengthening economy and are constructive factors for stocks heading into the second quarter.
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Generate 138% From a 25% Stock Move
Trading options is the best way to increase leverage and percentage returns while preserving capital and reducing risk, if done correctly. I've used options throughout my trading career and have even written two books on the subject.
Using options, we can amplify FCX's potential 25% move into a 138% gain. Specifically, I recommend buying FCX May 19 Calls for $3.10 or less to leverage a potential bullish move in FCX shares.
This call option has a delta of 81, which means it will move roughly $0.81 for every dollar that FCX moves, but it costs a fraction of the price of the stock.
The trade breaks even at $22.10 ($19 strike price plus $3.10 options premium), which is 4.6% above current prices.
If FCX hits John's price target of $26.37, the call options will be worth at least $7.37 ($26.37 target minus $19 strike price). Once you enter the trade, place a good 'til cancelled (GTC) order to sell your calls at that price.
Profit Amplifying Trade Setup:
-- Buy FCX May 19 Calls at $3.10 or less
-- Set stop-loss at $1.55
-- Set price target at $7.37 for a potential 138% gain in 74 days
I recently sat down with Profitable Trading's publisher, Frank Bermea, to detail how my options strategy works. It's the same strategy that allowed me to retire from Wall Street at the age of 23. Click here to watch it now.
Jared Levy
Options Strategist, Profit Amplifier
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