Honeywell International (HON) has been bullish for some time now, but with the election coming in November, we may see a climate change in the markets. There are influences facing the U.S. economy and world events that could have adverse effects upon the direction of the stock.
One of the biggest influences on Honeywell over the next quarter (or more) will be the government's handling of the fiscal cliff. These automatic spending reductions as well as the expiration of tax cuts approved under President George W. Bush are set to end in January. How the Congress handles this could greatly contribute to global recession. Spending reductions of roughly $1 trillion, half from the military and half from domestic programs are to kick in.
This could possibly affect Honeywell's military contracts. The agreement in cuts set in motion some $450 billion in cuts to Pentagon accounts over the next decade. The additional cuts would bring that total close to $1 trillion. Any political moves to delay these cuts may hit rough times since Obama declared he would veto any effort to undo the automatic cuts. But there are sure to be efforts in that direction.
Many businesses are holding back from expansion and hiring while we remain in limbo. Everyone wants to see how Congress deals with the budget and the expiring tax breaks. These delays hurt growth.
Citigroup remains bullish on the stock and has reiterated a buy for the stock with a price target of $70. I do not expect the stock to continue to raise much after the election because this is about the time that European information that is being suppressed until after the U.S. election will not be positive. There is fear that the possibilities of an economic earthquake exist with Greece and the Europeans want Obama back in the White House. For this reason, I see post-election trouble for the markets. As Philip Aldrick wrote:
"On Friday, the troika broke off talks for a week, with a decision still to be made on Athens' request for an extension to the 2014 deadline. Germany held its hard line, with its finance minister, Wolfgang Schaeuble, ruling out concessions for Greece."
So from now up through the elections, the markets should remain neutral to mildly bullish without much of a disturbance at all-at least this is what is being forecasted. I would expect Honeywell to continue on its journey upward, but only until about mid-November. If we start to hear about struggles coming out of Europe like is anticipated, it is going to wreak havoc upon the markets and this is the time I see Honeywell turning bearish.
The stock has been on a bullish run since it built a nice foundation from June through most of July. The RSI indicator is very supportive of this move as it has followed the stock all the way up. So far it continues to show strength. The MACD has been supportive of the stock also. I do observe the move under the '0' mark of the MACD Histogram is due to the stepping stone bullish pattern that the stock has formed. The consolidating periods are the steps that form like this. Now that it has moved up, we may see a period of consolidation to mildly bullish moves though October.
The Options Play
The stock is presently trading at about 60. I believe it will continue to move up in the short term and then get bearish as long as the markets remain that way. So I am going to look at a bullish income play and buy the first stock in the money.
- Buy the December 2012 call with a strike price of '60.00' (priced at $2.58)
- Sell the December 2012 call with a strike price of '62.50' 9priced at $1.31)
- Net Debit to Start: $1.27
- Maximum Profit: $1.23
- Maximum Risk: net debit
- Maximum Length of Trade: 3 months
Reasoning behind the Trade
- I expect the markets to remain neutral to mildly bullish through the election.
- Play the bullish trend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.