If you faded scary media headlines and jumped into this week’s FREE TRADE, then you were already up 2% Thursday.
Congratulations! How do you feel about a Basic Materials stock trade as well?
If you didn’t get into the Materials Select Sector SPDR ETF (NYSEArca: XLB), that’s OK, too… just realize that some Journalism major in New York with a keyboard and no direct market expertise shouldn’t be the one informing your opinion.
Thursday’s headlines were all over the map… They tilted bearish, with omicron-variant-scare stories taking the lead.
By lunchtime, omicron was still center stage. Only by then, the market had rebounded and Bloomberg was crediting “dip-buyers” with the turnaround.
Source: Bloomberg
File under: duh.
But that other headline I circled — how bankers are looking to juice their pay — is probably the one that should attract your attention.
This has been an epic year for a lot of that crowd… both to the upside and the downside.
Those who caught the downside — whether it was during the Volmageddon short squeeze in January and February, the summer slowdown or one of the many OpEx blowups — are already sitting at home.
The ones who remain are the folks who crushed it.
So I’m sitting here looking at Thursday’s bounce in the SPDR S&P 500 ETF Trust (NYSEArca: SPY), the Invesco QQQ Trust Series 1 (Nasdaq: QQQ) and the iShares Russell 2000 ETF (NYSEArca: IWM) and wondering…
When are these guys going to lock in their epic year-end bonuses and take the month off?
After all, that’s exactly what they did back in 2018.
Frankly, the answer this time around may be “soon.” And when they do, the market will be sure to tell us…
A Basic Materials Stock Trade
Winding down the book for the year can happen either through outright sales or hedging.
For anything with a short leash heading into the New Year — mostly interest rate-sensitive sectors like Energy and Financials — we could see some sales.
That means we should continue to be careful with the United States Natural Gas Fund (NYSEArca: UNG) and with our coal stocks, Consol Energy Inc. (NYSE: CEIX) and Arch Resources Inc. (NYSE: ARCH).
The latter two were up Thursday, so you should be selling some… especially if you bought Wednesday’s dip.
For everything else, though, some combination of covered calls, naked puts, put spreads, collars or other options strategies will be used to hedge and minimize risk.
And in turn, that means options expiry on Dec. 17 is going to be interesting — and potentially dangerous — as those hedges are unwound.
That’s part of the reason why I zeroed in on Basic Materials stocks this week.
Out of all the major sectors, it’s not just the one with the best outlook as inflation slows… It’s also the one that has been the least volatile over the past few weeks.
Source: Bloomberg
And when we look through their holdings, as I did briefly Wednesday, you can see why…
Source: Marketwatch
Industrial gas companies have had solid years helping reboot the manufacturing supply chain.
Paint companies have benefitted from a robust housing market.
Infrastructure-driven companies have benefitted from both inflation and government policy support.
And producers of critical materials like copper, lithium and agricultural products have all been in focus as the economy rebounds, pushing toward a greener future.
In fact, the only two subsectors among Basic Materials stocks that have declined over the past couple of months were petrochemicals, which got whacked by increasing oil prices…
And gold…
Source: Bloomberg
Now I’ve bagged on gold a lot this year. In fact, we’ve made a little money shorting it.
But that time is over.
First off, we are once again approaching the halfway point — $1,757/tr. Oz. — of last year’s epic COVID-19-fueled run.
Source: Bloomberg
Every time the yellow metal has breached that level, prices have found support between $1,685 and $1,750.
Moreover, we know that the country can’t keep up the breakneck pace of growth that resulted from reopening… We literally posted the highest year-on-year GDP growth in nearly a century back in June.
And while retail mobility data is starting to pick up again post-Thanksgiving, it’s still not back to its pre-COVID-19 baseline yet.
Source: Google
That may change as we head into Christmas. And if it does, we could see a re-acceleration of growth…
But whether it’s at this month’s options expiry on Dec. 17, in the low-volume doldrums after Christmas or after the New Year… that growth is going to turn around.
And when it does… It’s gold time.
All the best,
Matt Warder
Fortune Research
