Chart Outlook And Where Material Stocks Are Headed Next

by: David Ristau

Here are three interesting charts that we are looking at for this week:

SPDR S&P 500 (NYSEARCA:SPY) 5-Day Chart

Boeing (NYSE:BA) 5 Day Chart

Apple (NASDAQ:AAPL) 5-Day Chart

Daily Data: Materials Select Sector SPDR (NYSEARCA:XLB)

Material stocks have been in the news recently. Fast Money contributor Abigail Doolittle talked about XLB on March 1, mentioning that the ETF looked bearish. The founder of Peak Theories Research is looking for a confirmation price at $36.40 before she thinks it could hit $35. Abigail went further to suggest that a close on Freeport-McMoRan (NYSE:FCX) at $42 would be followed by a breakdown to $35. After reading this article from fast money, my attention was drawn to the Feb-Apr option expiration performance of XLB and its top 10 holdings - Dupont (NYSE:DD), Monsanto (NYSE:MON), Praxair (NYSE:PX), Newmont Mining (NYSE:NEM), Dow Chemical (NYSE:DOW), Ecolab (NYSE:ECL), Air Products & Chemicals (NYSE:APD), Mosaic (NYSE:MOS), and Nucor (NYSE:NUE).

The table above shows the absolute best/worst returns of the top 10 holdings in XLB. Based on the 10-year best/worst returns, I have estimated the max high/low price of each stock for Apr'20. This is not to be understood as to where I think the stock will go by Apr'20 but instead where I do not think the stock will go by Apr'20. In order for any of these stocks to reach my estimated max high/low prices on Apr'20 investors would have to show an unprecedented about face of buying/selling to break the 10-year max return range.

Notice that FCX was trading 14% above its estimated max low ($37.73) on February expiration and now it's trading only 11% above. If Abigail is correct on a $35 target on a breakdown in FCX, then the data above implies that it would be a great time to sell some put options or enter bull put spreads at or below the $37 level.

To save you time, I added the average return to the worst return (highlighted below). This column will help you identify which stocks performed the best relative to their drawdowns during this period.

For trade ideas I would strongly suggest looking at the tickers in the green having positive Avg+Worst return characteristics. As you may conclude PX and ECL have been the outperformers among these 10 companies shown, whereas to my surprise MOS has been the underperformer.

Suggested Trade: Praxair Inc. (PX)

Praxair Inc. (Chemical manufacturer) just missed earnings by a sliver on Jan'25 by reporting 1.36 vs. 1.367 (-0.51%). This report is not negative, since the company basically reported in line with estimates. The company has never reported a miss in estimates twice in a row for the past 12 quarters so it seems safe to assume it will beat on April 25. The stock has recently been trending sideways near its highs at $110, just waiting to breakout. Based on the data above this may be a great time to enter the historically best performing holding in XLB from Feb-Apr, because PX is currently trading only 0.36% above its estimated max low. To build your confidence in the data, look at the return on PX during the Feb-Apr expiration period.

(Decimals are omitted)

Notice how PX only declined once during this time period, further notice how the max decline was only -1% (it's actually -0.6% but I omit the decimals). These historical returns certainly favor a bias to the upside during the Feb-Apr time frame. Based on these data I suggest the following option trade.

Suggested Trade: PX - Sell Apr'20th 105/100 Vertical Put Spread (Bull Put Spread)

(Sell 105 Put/Buy 100 Put)

Size - 5% of Giorgio's Corner Portfolio Size = (1 Spread)

Entry: Sell Limit: 0.70

Stop Loss: 3.00

Exit Price: 0.00

Max Return: 16.27%

(Note: Return calculation does not include commission; Max Return is calculated as Return at Risk based on my entry, not Return on Margin)

Suggested Trade: Ecolab Inc. (ECL)

Ecolab recently pulled back to the bottom of its strong upward channel. ECL just broke its 50 SMA, and it looks worrisome since the stock closed down -5.01% this week. The stock has sold off since the company lowered its 2012 estimates on Feb 28, and JPMorgan downgraded the stock to 'neutral' from 'overweight' on Feb 29. The data is bullish on ECL though:

Like PX, ECL has only returned a negative return once in the Feb-Apr time frame over the past 10 years. Based on these data I suggest the following trade.

Note: We may initiate this trade next week.

Suggested Trade: ECL - Sell Apr'20th 57.50/55 Vertical Put Spread (Bull Put Spread)

(Sell 57.50 Put/Buy 55 Put)

Size - 10% of Giorgio's Corner Portfolio Size = (4 Spreads)

Entry: Sell Limit: 0.40

Stop Loss: 1.35

Exit Price: 0.00

Max Return: 19.04%

(Note: Return calculation does not include commission; Max Return is calculated as Return at Risk based on my entry not Return on Margin)

Suggested Trade: The Mosaic Company (MOS)

As I said above I was very surprised to see such a negative avg+worst return percentage for Mosaic. I've written about Mosaic with a bullish bias since December and I was surprised to see the data show a bearish bias for Feb-Apr. Below we can review the data for Jan-Mar that I posted in my last article about Mosaic.

Notice how bullish the data looks above, now let's compare it with what the historical returns have been from Feb-Apr (below).

As you can see the Feb-Apr returns show dramatically different picture than the Jan-Mar returns. Despite a strong rally in the market Mosaic was not able to breakout above its 200-SMA and recently the stock has been struck with a series of down days. Indeed weakness may exist in this name. I have never recommended a trade on MOS for our portfolio because I was afraid MOS may resume its downtrend one of these days. I missed the rally in the stock, and now after seeing this new data I do not want to get hung up in a bearish seasonal trend in the stock because the estimated max high is far too high above the current stock price to recommend a bear call spread. However, an equity spread trade may be appropriate. I think long XLB / short MOS with equal amounts of money is the play here. Right now ratio of XLB to MOS (XLB divided by MOS) is 0.65, if the decimal changes to 0.60 before Apr 20, I would exit the spread. The goal here is to exit the spread on Apr 20 in hopes that XLB outperforms MOS.

The picture below shows the current ratio of XLB to MOS.

In a bull market: we're hoping XLB goes up more than MOS

In a bear market: we're hoping XLB goes down less than MOS

You may wonder why I'm not mentioning long PX / Short MOS. I think it's less risky to go long one ETF and short the estimated worst performing stock in that ETF.

Charts are from

Disclosure: I am long AAPL. We have options on Apple (AAPL) and SPY.