It’s hard to imagine any company could be oversold in our presently bullish stock market. It’s not only the fact that the major indices are setting records, but that they are doing so in spite of the horrific economic conditions. We still have over 16 million people out of work in the United States and more than 10% unemployment. Those aren’t stats we usually see at the tops of markets.
Things are so bad that the government has begun to subsidize income for people and businesses alike. It’s hard to track just how much when the money keeps flying, but the total must be inching towards $4 trillion already, the Fed’s overnight lending operations notwithstanding. The original CARES Act itself was $2 trillion. Politicians are even thinking about paying people so they would get back to work.
Within all of this mess on Wall Street we are going to try and find three oversold stocks today. The concept is to get long tickers that are falling into support zones. Support can come from levels on the chart but it can also come from intrinsic value.
In this case we have both kinds which makes it exciting and gives added levels of conviction. Doing homework like this arms the traders with knowledge to better manage the risk. This is an important part of a successful trading process to neutralize emotional mistakes.
Two of the three tickers today are not even companies. They are investment classes and we will trade their ETFs. They are:
- Gold – SPDR Gold Shares (NYSEARCA:GLD)
- U.S. Bonds – iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT)
- Intel (NASDAQ:INTC)
Oversold Stocks: SPDR Gold Shares (GLD)
Gold rallied ferociously on the back of media headlines focused on the precious metal marking new all time highs. The time to be long gold started years ago, and that thesis only got more urgent this year. This concept was the focus of many of my write-ups from 2017 but more recently in early May; prices have rallied more than 20% since then.
Central banks are demolishing the value of cash therefore investors must seek other assets that can hold value like gold and Bitcoin. Governments cannot control them, so they’re out of the line of fire from whatever QE program the ECB or the Fed dream up next.
I understand the need for the Fed to provide liquidity to save our economy from collapse, but they are taking too much risk out of the investment community in the process. Evidence of this is the record low yield on junk bonds. Buying stocks is not what a central bank should be doing and this experiment has unknown potential side effects. Investing in risky assets should be, well, risky, and messing with this premise makes for a wonky market.
Gold finally set a new all-time high after almost ten years. This isn’t an obvious time to go long with a giant position due to the sharp rising wedge just drawn on the chart. However it is appropriate to buy some on the dip for a trade.
Yesterday GLD fell below $180, which is a bit concerning from a technical perspective, as it could trigger a bearish pattern bringing another $6 sell off. In addition, it has already fallen 8% from its high, which is quite close to an official correction as defined by Wall Street traders.
Since they don’t ring bells at tops and bottoms, this would be a decent place to nibble on GLD stock. Buying this dip, especially if it falls another $6, would also be a potential swing trade that suits traders and investors. The value of gold should never decrease for too long because it is rare and it’s getting harder to extract.
iShares 20+ Year Treasury Bond ETF (TLT)
For decades U.S. Bonds and equities have competed for investment money. You can see this in the age old debate over the healthy balance of a portfolio being 60/40 ratio of equities to bonds.
Buying bonds has also been the knee-jerk reaction to big dips in the indices as the safety trade. Investors also buy bonds for their fixed income, but that has been whacked at the knees by the central banks. At least in the U.S., investors can still get some yield, albeit a tiny one.
Overseas bonds presently carry a negative yield, so owning bonds means investors owe the government even more money on top. This gave birth to a new phenomenon we call TINA, or There Is No Alternative. Big international money has no choice but to buy U.S. bonds. An easy way to participate in that is by trading TLT stock, and using the TINA phenomenon to place a bid below the current price. This makes every dip an opportunity to get long, but the trick is finding the right levels.
In this case, the stock quickly corrected by only 4%. But more importantly, it has fallen into its prior breakout point from early July. Pivotal zones like this usually provide support on the way down, so I anticipate that buyers will step in soon. Going long TLT stock here is an opportunity for a rally. The swing trade higher could exceed $169 per share, and this would close the gap the stock left open this week.
With any luck the buying frenzy will rekindle and bulls will see a breakout above $172 per share. Falling below $164 is detrimental to thesis. Another way of catching this falling knife is to sell put spreads below $163; this trade would not need a rally to profit.
Intel (INTC)
Intel is the redheaded stepchild of the three major chip companies. Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA) are setting record after record, but Intel cannot get out of the gate.
This is the result of horrendous management, at least relative to the superstar leadership at its competitors. But I believe that INTC boasts enough assets to engineer a sustainable turn-around. So far, Intel has failed to sustain rallies longer than a few days.
The reaction to the recent earnings report was atrocious, as the stock fell by 25% in mere days. The punishment was warranted but the silver lining is that this appears to have marked the covid-19 bottom for Intel. And therein lies the upside opportunity in INTC stock for the long haul.
The test in March came under the most difficult conditions, and while these earnings were bad, they were no worse than a completely closed world. This alone is reason to buy the dip and expect profits into next year.
INTC has the potential to be a midterm swing trade but the intention is to own it for the longer-term. This is a great American company that is worthy of some benefit of the doubt. They will eventually figure it out and the ride will be exciting.
The long-term charts indicate INTC stock has held a strong footing near $45 per share since 2017. I see nothing new that warrants that level failing now. This should give new bulls the confidence they will need to mount the recovery rally.
Selling puts is another way to get long this stock in case the rally fizzles. For example, you could sell the January $40 put and collect $1.50 for it. This trade can sustain another 20% drop from current levels before losing money.
This is the wildest market we’ve ever seen, so no one should expect absolute confidence in their trades. Having conviction is good, but it’s better to have discipline managing risk. There are lines that need to hold for each of these trades and it is important to be diligent with sticking to the stop losses.
GLD could be the exception to that because eventually it will make another new high. But the fates of the other two are in the hands of unreasonable leaders and investors.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.