How To Trade For A “W”-Shaped Recovery
This is an unusual year, obviously.
Normally, here in Wyoming, we would be planning for the rodeo. This year, there won’t be a rodeo. That has important implications for the economy.
Wyoming is small. Cancelling a rodeo has a large impact on the local community. Many businesses count on visitors to boost sales, and at least a few business models are only profitable because of the influx of visitors.
That problem isn’t unique to Wyoming. Businesses from the Jersey Shore to surf shops on the West Coast have the same business model. So do many in between the coasts.
These seasonal businesses provide a living for owners and employees. The owners and employees live and shop in their local communities. Their loss of income reduces the incomes of other local businesses.
This will sadly create a crisis for some of those affected by the loss of income. They may even be forced to move. That affects home prices and local taxes. These problems are being seen in all 50 states, and there is no plan for recovering from these problems because we still don’t know how bad the problems will be.
Yet, stocks are higher.
That’s clearly a V-bottom on the S&P 500. But the economy is likely to suffer through a W-shaped recovery, with an initial recovery followed by a second downturn as the problems held off by government aid surface.
This indicates a second downturn in the stock market is likely. But, as I’ve been saying for the past few weeks, that doesn’t mean you should necessarily sell everything and move to cash.
But it does mean that you should consider getting a little more creative with your trading strategy.
How I’m Trading Right Now…
One strategy that’s worth considering is the put-selling strategy we use over at my premium service, Income Trader.
For example, I just recently recommended a trade on Stryker Corporation (NYSE: SYK).
Stryker makes a variety of medical products, including implants used in joint replacement and trauma surgeries; hospital beds; endoscopic systems; and neurosurgical, neurovascular, and spinal devices.
These are what Warren Buffett would refer to as “wide moat” businesses.
Like the water-filled trench around a medieval castle, a wide moat serves as protection. For a business, the moat is a competitive advantage that makes it difficult for rivals to enter the market. Medical equipment requires research to develop and highly regulated factories to build the equipment.
It could take years for a new entrant to emerge in the joint replacement market. Any new product would need the approval of regulators. And then doctors, of course, would need to be convinced to try a new product.
SYK’s moat has led to steady sales growth averaging 9% a year over the past five years. The company enjoys strong margins in its businesses because there is little competition and little price pressure (since consumers lack bargaining power in healthcare).
Earnings per share (EPS) have grown at an average of more than 32% a year over the past five years. And analysts expect EPS of about $6.35 this year and $8.79 next year.
The stock’s Income Trade Volatility (ITV) “buy” signal can be seen in the chart below. (ITV is the tool I developed to help select my regular weekly Income Trader recommendations. Of the weekly trades I’ve recommended, 90.5% have been winners going all the way back to 2013.)
The dashed line on the chart shows significant support at $170 that dates back to 2018. Support levels like this limit downside risk.
Action To Take
Based on this information, I believe the stock offers upside to long-term investors. But it’s also appealing to short-term income traders. That’s why I recommended selling a put option that expires before the company announces earnings at the end of this month.
I can’t give you the exact details of the trade out of fairness to my subscribers. But what I can say is that simple income-producing strategies like this are exactly what you need at uncertain times in the market like this.