Glad that’s behind us.
The world awaits a new day, friends – a new era replete with sunshine and stock market profits and nothing else besides.
And that’s precisely what it’s going to get.
For in the same way that Nero was said to be fiddling while Rome burned, so the modern equivalent here in America is avoiding that corpse on the sidewalk as you banter with your broker about the latest tech IPO.
Step over that body, bro!
With a couple of major distractions now out of the way, the world will have to invent some new ones if the stock market’s going to continue its wild ascent.
We’re referring, of course, to the mid-term elections, which by all figuring have to be considered a tick in the plus column for the stock market. After all, Republican control of both houses gives many a warm feeling about the future of business and economics in America.
The other issue is Ebola, which these last few days have been all but vaccinated by the press. We even found a link that supports the notion that we’re over the hype hump with that dreadful virus.
The story can be found here, and essentially reports that:
“The rate of new Ebola infections… has declined so sharply [in Liberia] in recent weeks that even some of the busiest treatment facilities are now only half-full…”
Good news for West Africa.
But the market climbs a wall of worry. And when the worry ceases, complacency sets in. And then the climber gets tired.
There are a host of other reasons that the market struck new highs this week, but certainly the prospects of a Republican victory gave investors reason enough to pile back in. And if last week’s ETF inflows are any indication; we should shortly see another skip-to-my-lou northbound jump in the weeks ahead.
Cash entering U.S. listed ETFs last week surged to levels not seen for the last six years, with $21 billion coming back into play, leaving many analysts and strategists pondering whether the so-called ‘sideline money’ – ma and pa and the rest of Main Street – were finally getting off their buckets and starting to pony up.
We believe they are.
And as they do, we also believe those stocks with a greater risk profile will outperform the non-cyclical issues that dominated investor thinking over the last month while markets swooned.
Look here –
The above chart well illustrates the point.
As of today, close to 90% of the S&P 500’s consumer staple issues (favorites of the widows and orphans set) are trading above their 50-day moving averages.
On the other hand, the consumer discretionaries, typically more volatile, have lagged of late, suffering to a much greater degree during the downturn in October, with only 65% of their components trending above their 50 DMAs.
We believe that a narrowing of the gap between these two sectors is inevitable, and likely sooner than later, in light of the euphoria surrounding the election.
But why not just buy an index? Why all the finagling?
Friends, you can buy an index. It’s a perfectly good strategy in a bull market. But our mission here at Bourbon & Bayonets is somewhat different than the passive approach adopted by many of our competitors. Here, we seek to outperform, and we regularly offer you strategies that assist you in doing exactly that.
Like This Week
Today, we want you to take a gander at two ETFs from those same two sectors, both of which are voluminously traded and also happen to be operated by Standard and Poors.
Here they are (below) for the last three months. The Select Sector SPDR Consumer Staples ETF (NYSE:XLP) is on the top, while her sister, the Select Sector SPDR Consumer Discretionary fund (NYSE:XLY), is on the bottom.
But as we mentioned above, we expect the gap to close quickly and we offer you two distinct ways to play it.
The first is a straightforward long/short trade – buying XLY and selling XLP in equal numbers. There’s no time limit on the trade and no leverage in play. But it will cost you. XLY trades for $67.55, while XLP goes for $47.47. A board lot of each will therefore run you $2008 and will profit if/as/when the discretionaries outpace the staples.
The other option is to buy and sell a CALL or a PUT on the two.
We’d recommend a sale of the nearest term out-of-the-money XLY PUTs and simultaneous purchase of longer term OTM XLP PUTs for roughly the same price.
Your outlay here is far less than the long/short trade, and you do enjoy some leverage – for better and for worse.
Many happy returns,
Matt McAbby, Senior Analyst, Normandy Research