From Staples to HealthCare (MCK,TSN,UPS)

 

A couple of important developments to apprise you of today, the first being China.

 

The communist regime in that country is in as much danger of being replaced by new revolutionary forces as are the GOP and Dems here at home. And they know that a continued deterioration in the state of their capital markets will all but guarantee a massive grassroots revolt.

 

They’re scared to death of it, too – perhaps more than their American counterparts. There’s a burgeoning need on the part of the average Chinese to exact vengeance from a regime that has made his life a living misery for decades. And the only thing standing in his way is a relatively reliable paycheck. Take that away, and there’ll be blood in the streets, to be sure.

 

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But it’s not the poor factory worker who’s going to lead the next Chinese revolution – though he’ll be there and angry, of course, and will want his pound of flesh. It’s rather the rising middle class of that country who will roll out the guillotines. Make no mistake: it’s always the rising middle class that leads the charge whenever revolutionaries take to the streets.

 

For once a man has started to climb the social ladder, his thirst to acquire more becomes insatiable, and he also comes to realize that those above him, his erstwhile overlords, are really nothing special. They’re just like him, in fact. He can smell their vulnerability. And he covets their life.

 

So it is in China.

 

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That’s why authorities in that country are doing everything they can to ensure economic growth and a continued rise in share prices on the Shanghai Stock Exchange.

 

Their most recent move to that end has been to reintroduce the possibility of buying stock on margin, and what’s more – get this – it’s speculated that they’re going to permit investors to employ a P2P (person to person) lending technology that facilitates ‘non-brokerage margin lending’.

 

Whoopee!

 

Sound like fun?

 

It gets better.

 

There’s also talk of allowing commercial banks to enable more of that jolly old ‘non-brokerage margin lending’. That’s where all the ‘good’ is, after all, no?

Regulators are also openly discussing whether to remedy the current lack of liquidity in the market by pushing margin availability from its current 1:2 leverage ratio back up to 1:3.

 

In other words, by hook or by crook, get ready for a Chinese rally.

 

Making Hay from the Jawbone of it all

 

We can see the results already. Investors are back in the game. The Chinese market is up better than 21% over the last month, and in no way looks overbought. There could be plenty more to come from a purely technical perspective.

 

And why are we harping on this? Because once the China bogeyman is removed from the jitter-picture that has prevailed since the beginning of the year, there’s great incentive for investors to pile back in. The kicker in the China rising story is that later this year the tech-heavy Shenzhen Stock Exchange (China’s answer to the NASDAQ) is slated to be connected to Hong Kong investors, an initiative that already goosed shares on the Shanghai exchange directly after it was instituted.

 

Look for rising markets across the communist Asian frontier – and a positive spillover effect here.

 

Look at the Dow –

 

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Back at home, the mood’s still dour. Despite the market’s return to positive for the year, most investors remain scared, and even the professional set is defensive – their outsize cash levels clearly attesting to that.

 

As the chart above shows, the elevator has moved in a straight line upward – to the tune of nearly 2200 Dow points in a month and a half. If there’s a pullback, we don’t see it moving below strong support at 17,400. That’s where both long term moving averages are pinched (yellow and orange), and it’s unlikely we’ll see a fall below that line.

 

That said, we don’t expect a pullback at all. With just a week to go before quarterly reporting and most fund managers trailing the indexes by a wide margin, we’ve every reason to believe they’ll position themselves aggressively in the next few days to add to their quarterly gains.

 

Closing One and Opening Another

 

We’re going to look at a bevy of UPS trades today that have already closed, or should be closed. Then we’ll give you a new bet for the day.

 

Let’s run down the full UPS story for you.

 

  1. To begin, we opened a trade on November 5th in a letter called Short Squeeze Leads to a Kick in the Bulls, for which we pocketed a premium of $0.41 and ended up with 100 shares of UPS purchased at $100.
  2. Subsequent to that, we sold two UPS 95 CALLs for $1.01 each and bought one UPS March 100 CALL for $0.36.
  3. As of last Friday’s close, the shares were called away against one of the short CALLs, and we sustained a loss of exactly $500 on the spread (100 – 95).

 

For the entire round, our loss, therefore, sits at $293 (41 + 101 + 101 – 36 – 500).

 

So much for round one.

 

Then, on March 3rd, we sold short one May 95 CALL for $5.75 and went long two (2) July 100’s at $3.55.

 

And today, with UPS trading hands at $105.31, the May 95 CALL trades at $10.63, while the July 100’s are going for $7.05 each. Buy back the former and sell the latter for a profit of $347. Peg that against the earlier loss of $293, and you take home $54.

 

Sometimes it’s just better to have done with the damn thing.

 

New and Shiny!

 

Todays’ initiative is centered around two sectors that have flown entirely different trajectories of late. The first is the high flying Consumer Staples. The other is the Health Care group, that has been weaker than weak.

 

A look at the charts below gives an indication of the strength of each –

 

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The red section indicates the sector has entered territory two standard deviations above its 50 day moving average, the green section, two below.

 

What we’re going to do today, is bet on a sector rotation trade that sees money moving out of the staples and back into health care. And we’re going to use two representative stocks from those sectors to play it, Tyson Foods (NYSE:TSN) and McKesson Corp. (NYSE:MCK).

 

Tyson registered a screeching overbought RSI read at the end of February, while McKesson went extreme oversold in mid-January.

 

Here’s how the two chart against one another for the last six months –

 

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We’re betting that the gap will now close, and we’re playing it by going long McKesson CALLs and short Tyson CALLs.

 

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Options Trader Elite recommends you consider buying the MCK January 180 CALL for $6.10 and selling the TSN January 67.50 CALL for $6.30. Total credit on the trade is $0.20.

 

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Many happy returns,

 

Matt McAbby

 

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