September 13th, 2022

Is the Market Growing Stronger Or Is There Something Else Afloat?

Monday’s market move had nothing to do with market strength.  The Core CPI numbers are released today, so Monday’s price action most likely came from a weakening dollar.  That helped propel sectors like Technology to near the top of the relative performance charts.

 

But let’s take a step back before we’re too bullish on Consumer Cyclical and Technology.

Let’s review short interest, or short float, which is the percentage of shares that investors are shorting relative to the total available.  Many stocks within the top two performing sectors have a high short interest.  So as the market goes up, it can force those with bearish positions to have to buy back shares, thus continually pushing up the stock.  So while that brings short-term gains, that doesn’t necessarily mean it’s time to load up on tech as a whole.

Meanwhile, there’s another group of stocks that are showing strength and those are the stocks we will look at for today’s trade idea.

Some of the discounters like Overstock.com (OSTK) and Dollar Tree (DLTR) are also up with the rest of the market.  Overstock is likely to retest its August highs around $34 – $35. 

 

Here’s a chart of DLTR after their earnings on 8/25.  They had a huge gap down and have been drifting higher since then.

 

Now, look at the call options.  There are 7,934 call options set to expire in a few days at the $150 strike price.  The current price is $145.75.

 

We could easily see DLTR drift higher by the end of the week. If it rises up to $150, we could see DLTR fill the gap and head back to the $160 range.

 

My short idea comes in the form of the iShares U.S. Real Estate ETF, ticker IYR. As interest rates increase, it will put pressure on the real estate sector and IYR could turn back around and come back to retest the $93 area. This may not happen right away – it could rise up to around $100 before pivoting lower.

We will get a better idea if we will have true market strength after the CPI data is released today.  We should get a better idea of how aggressive the Fed will need to raise future rates.  That said, the consensus is still a 0.75% increase in September. 

 

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Jeff

Guest Writer, Filthy Rich, Dirt Poor

 

Editor, Wealthy Investor Society