A Reversal Could Happen Soon — Here’s How To Prepare
The Commerce Department reported U.S. retail sales grew 0.3% in October compared to September. This was slower than the 1.6% gain reported a month ago. And October’s data was less than the 0.5% economists expected according to Wall Street Journal.
Sales at clothing stores, sporting goods stores, and department stores all fell more than 4%. Grocery stores reported a 0.4% decline in sales compared to September, a surprise given that many consumers are preparing for new shutdowns by stocking up on food and paper products.
These declines are a bad sign for the economy. Amazon.com finally held its Prime Day last month, and competitors including Walmart and Target also offered big deals. The drop in sales means we might see the economy slow even more heading into the holiday season, a time of year some retailers rely on for the bulk of their profits.
The chart below shows that retail sales were fueled by the various stimulus programs to new highs.
Source: Federal Reserve
Based on the fact that there is unlikely to be another stimulus program before the end of the year, retail sales are likely to drop.
This will indicate consumer spending is down, and that will affect corporate profits. Despite the likelihood of a bad quarter, stocks are moving up — for now — as you can see in the chart below of the S&P 500.
This chart shows that momentum is overbought, and stocks could reverse soon. Momentum is shown as the stochastic RSI indicator, which is found by using the value of RSI instead of closing prices in the stochastic formula. This indicator tends to turn only at important market reversals.
How I’m Trading Right Now
With major stock market averages vulnerable to selloffs, I continue to remain cautious. However, as I’ve said throughout this year, that doesn’t mean we don’t have opportunities to trade.
In fact, I recently recommended a trade in QUALCOMM Incorporated (Nasdaq: QCOM).
Qualcomm was recently in the news with a strong earnings report. Less noticed was a report that the company was granted a license from the U.S. government to sell 4G mobile phone chips to China’s Huawei Technologies Co Ltd.
Companies have been banned from selling to Huawei over security concerns. European countries and the United States are concerned that the Chinese government could access data systems using Huawei equipment.
Qualcomm’s news seems to indicate U.S. companies may be able to sell older technologies to China. This should lead to increases in earnings estimates for companies that receive the approval like QCOM.
This makes QCOM attractive in the short term. The Income Trader Volatility (ITV) “buy” signal confirms the stock’s relative safety.
Action To Take
The trade I recently recommended in QCOM involves selling put options. This is a good alternative for bullish investors who would like to generate quick income from the stock — with the chance to buy this solid stock at a discount if the price does somehow pull back.
Another strategy investors should consider right now is one that can be done with stocks they already own…
It works like an “insurance” program for your stocks, allowing you to collect income for essentially doing nothing.
I’ve been using this strategy for years, and it’s been ignored for far too long by individual investors.