Investors across the land are all seeking an answer to the same question. Was that the bottom? Stocks rallied vigorously off the lows, but with the trend still pointing lower, buyers are understandably worried this could be a dead-cat bounce. To plan for that eventuality, I have three stocks to sell.
My previous message identified potential stocks to buy by focusing on high relative strength readings. Today we’re doing the opposite. I scanned my watchlist for those flashing low RSI readings and discovered a recurring theme. Many of the weakest companies came from the retail sector.
The sluggish RSI numbers mean these stocks all failed to participate in the market’s snapback rally. While many names ripped higher, these deadbeats couldn’t even get off the mat. And that makes me think they’re likely to suffer disproportionately if this market rebound doesn’t hold.
Here are three ailing retailers that should be considered top stocks to sell.
Amid the ongoing novel coronavirus crisis, Dicks Sporting Goods (NYSE:DKS) finds itself on the ropes. Retail is rubbish in an environment where state governments are ordering shoppers to stay home.
Optimists will argue that with the 60% haircut, the market has already priced in the damage. And perhaps the stock has overshot to the downside, making it a bargain for those with the patience to wait for the inevitable recovery.
It’s a fair argument. But with so much uncertainty swirling around, it’s anyone’s guess as to whether the sharp reduction in Dick’s profits has been adequately baked in. I prefer to take my cues from the price chart. And so far, the action remains unconvincing that a true bottom has formed. Here’s a low-cost spread to speculate on more pain.
The Trade: Buy the May $20/$15 bear put spread for around $1.40.
At least Dick’s shareholders participated somewhat in the market snapback. Owners of our final two picks weren’t so lucky. Urban Outfitters (NASDAQ:URBN) shares are working on yet another down day and have already pushed close to their 52-week low. The relative weakness should concern owners and makes URBN stock an easy target for sellers.
There is a longer-term support zone near $14 that halted two prior bear markets in 2006 and 2008, so there is a chance we could see a bottom carved out here. I’m giving the persistent weakness more weight right now, though. A push back above $17 would invalidate the bearish thesis, so we’ll use that for the stop loss in the following trade:
The Trade: Buy the May $14/$12 bear put spread for 78 cents.
We’re ending with the weakest of the trio — Nordstrom (NYSE:JWN). At 28, it has the lowest RSI reading, and it is already back to testing last week’s lows. Unlike Urban Outfitters shares, however, JWN stock has room to drop to $10 before reaching the 2008 lows.
A break above resistance at $22 would justify becoming more bullish. Until then, it’s game on for bear plays. While you could short the stock, long puts or put spreads offer limited risk and a lower-cost alternative.
The Trade: Buy the May $15/$10 put spread for $1.45.
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