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Go macro.
That is increasingly the recommendation from strategists at big banks as macroeconomic conditions strength, suggesting that cyclical stocks could be poised to outperform other investment styles, such as growth.
Wall Street’s focus is turning from the traditional market leaders found among major technology stocks to names that aren’t often part of the market narrative.
for example, screened the
for stocks with characteristics including three-month average daily trading volume greater than $10 million, market capitalizations above $1 billion, and a preference for stocks that tend to exhibit more volatility than the market.
While the Street will dress up the interest in cyclical stocks in quantitative language, the theme is animated by an idea that anyone can understand. Many people think that the U.S. economy will roar back this year as people are eager to spend money after the Covid-19 pandemic kept so many of us quarantined at home.
“We believe a move favoring value and cyclical stocks is likely to accelerate into late spring and the summer,” Shawn Quigg, J.P. Morgan’s derivatives strategist, recently told clients in a note.
The rally is also expected to gain power from a continued rally in commodities and a resurgence in rising Treasury yields, which Quigg called near-term catalysts for value and cyclical stocks.
To pre-position, Quigg recommended that clients consider June “call-spread collars” on
(ticker: CLF),
(DAL),
(SYF),
(MPC), and
(PSX).
A call-spread collar entails selling a put option and buying a call option at just above the stock price, and selling another call with a higher strike price. The strategy positions investors to buy stock on a decline and to participate in advances.
Rather than using strike prices, however, Quigg used a pricing convention that is common among institutional investors and less known among other investors.
Quigg suggested his clients focus on selling a 90% put and buying a 102.5% call, while selling a 110% call. In translation, this means investors should sell a put that is 10% below the stock price, buy a call that is 2.5% above the stock price, and sell a call that is 10% above the stock price.
Not all options will naturally fit the pricing convention because of differences in strike prices among different stocks. Investors should consider the pricing criteria as guidance for selecting strike prices.
Seasonal factors also may support the trades.
The cyclical stock moves could be stronger than merited because market liquidity remains thin, Quigg noted, which could increase the potential for the stocks to jump sharply higher because there is not enough trading volume to absorb investor buying interest. The pricing gaps could be particularly acute in the summer, when so much of Wall Street heads to their vacation homes.
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.
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