Altria Group (MO) is very close to a short-term pullback. From the included blocks it is fairly obvious that a major merchandising stance was established by the Designated Market Maker in this issue. I believe this is indicative of his distribution and short selling, as well as other exchange insiders. I am recommending that Altria Group be shorted, but not until after June 13, which is the ex-dividend date.
The blocks on June 7 and June 8 represent almost $1.3 billion. Clearly market heavyweight(s) were moving capital. My guess is they were moving it out of Altria Group for the short term, but they will be back. An anticipated move of $3.00 does not seem like much, but when you multiply it times the number of shares traded, it is over $115 million. Not bad for a day's or week's or month's work.
As you can see from the chart below, Altria Group moves in lockstep with the Dow. My overall market view is that the market will be headed lower and that the decline will be completed around late August to mid-September, at which point the Altria Group Designated Market Maker will once again be packing heavy with inventory and begin an advance that will be continue into the end of the year.
This is not a high beta stock, so I only anticipate a pullback of $2.00 to $3.00. Once it approaches the exit trigger, you could conceivably sell some puts (depending on how attractively they are priced) and hopefully the stock will be put to you. This should position you for some nice upside into the end of the year. Or you could just wait it out and buy Altria Group on the pullback. It is, for the most part, a matter of temperament. Personally, I love the action but not the stock. It is just another trade.
Click to enlarge image.
On the basis of the foregoing, these are my views and observations:
The Trade
I recommend establishing a short position in Altria Group. Open your position with only one-fourth of whatever capital you intend to commit to the stock at $33.36. Purchase the remaining three-fourths of the position at $36.03 and stop out at $37.44. Do not post your stop out. I have said it before, but it is so important that at the risk of being redundant I will say it again: It is too easy for the Designated Market Maker to cash investors out by moving the price above or below your stop out and move the price right back down or up again.
In addition, when a stop out is triggered it converts into a market order and that could be disastrous if the Designated Market Maker decides to really take advantage. Remember the "Flash Crash"? I would be looking to exit the trade at a downside price target of $31.32. Do not allow this position to exceed 5% of your overall portfolio. I would seriously consider establishing a long position at or near $31.25 and apply the same rules for position sizing. You could also sell some near close to expiration puts in the hopes of having the stock put to you. If it is put to you, then the premium will bring the cost basis down and if not then the premium is money in your pocket.
There is always the possibility that the trade may not work out.
Never a Sure Thing (Particularly With a Short)
Investors must realize and recognize that there is never a sure thing. Sometimes events that have a low probability of occurring bring forth very serious consequences should they come into being. Investors must judiciously consider what the inherent practical limits are and how much they stand to gain in relation to the risks involved in establishing any position.
In addition, persistence can become desperate folly by allowing a losing position to become a viable argument for deciding on a new position. Rather, such decisions should be based on the current and soon-to-be circumstances.
Any position in which one unexpected factor has a significant impact on your portfolio is the result of poor planning. It is a fault most commonly associated with people who want to explain away their losses. If you follow the process recommended and the trade does not work, the overall loss in this model is $3,000.00. That amounts to 0.003 of the overall portfolio (theoretically valued at $1,000,000).
Finally, never be a brave and brainless investor, because a fool and his money are soon parted.
A portfolio of $1,000,000 should position size in the following manner:
This is a trade, not an investment. Be ever vigilant.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in MO over the next 72 hours.
