A Potent Combination

Before Tuesday’s lukewarm rebound, the broad market was more oversold than at any time since late in 2012. That factor alone often provides fuel for a dynamic rally.

Hints of a possible economic slowdown magnified the negative market flavor when it came to the retail group. They hadn’t been participating in rallies prior to last week’s action and had fallen off a cliff in recent days. Consequently, high-quality consumer-related stocks have fallen into very attractive territory.

The Great Recession of 2008-09 was the worst period in my remembrance in terms of the public hunkering down and deferring spending. I don’t see today’s situation as nearly that acute.

The confluence of the generally oversold market and the dramatically out-of-favor industry group sets the table for big gains on the hint of anything-but-the-worst news. March has been the best month of the year for this group, on average, since 1990.

Accordingly, I’ve been shorting Jan. 2015 and Jan. 2016 expiration puts on a number of companies that seem sure to survive and prosper. Break-even points on some well-chosen options can take put writers down to levels that would beacon outright purchase even if you believe consumer weakness may persist for a while longer. (See our Virtual Put Selling Portfolio.)

Some names to consider using for underlying stocks:

Prices as of Tuesday, Feb. 4, 2014

• Wal-Mart (WMT)  $72.29     
• Nike (NKE)  $70.45
• PetSmart (PETM)  $62.82
• Bed Bath & Beyond (BBBY) $63.00
• The Buckle (BKE)  $42.49
• Coach (COH)  $45.60

All six firms have fine balance sheets and are solidly profitable. To see the current puts we are short in our Virtual Put Selling Portfolio, visit me at Market Shadows.com.