Rally Time?

On Friday, I sent the following message to my Real Income Trader subscribers: 

There is no opportunity without a little scare first…

And in these low-interest-rate, robo-trading days, you gotta manufacture that scare because human emotion is no longer at the helm of day-to-day trading. 

There are a lot of areas where you might think the president could do a better job. Creating buying opportunities is not one of them. By my count, this is the fifth time he’s tanked stocks with his on-again, off-again bromance with Xi. 

I’m sure some will be tempted to say that Wednesday’s beat-down was due to the yield curve inversion, not trade. But why did the curve invert? It’s because the trade war is hitting an already weak global economy, and that’s pushing central banks toward easing. And you buy bonds when you think rates are going down (because rates get cut to battle weakness/recession). 

Now, A + B + C doesn’t always equal D. And this is where the market’s formulaic thinking creates opportunity. Just because the Fed cut rates doesn’t mean we are heading into recession and you should buy bonds…

The weakness we are seeing is policy-related (trade war, weird stimulus policy in EU), and the Fed has to respond to weakening data no matter the source, and when has global growth not been on the weak side in the last decade? (Oh yeah, there was that one quarter in 2012 where EU growth beat expectations. Ha! That never happened!) 

The U.S. economy is driven by consumer spending, so really, all you have to do is focus on what the threats to spending are. If corporate America thought the trade war was permanent, they’d act differently. Right now, they are avoiding passing on cost increases to the consumer. And consumer spending is very strong. 

The market playbook for times like these calls for, like, an eight-day rally. I know, it seems crazy every time. But that’s what happens, and the four most dangerous words in investing are “it’s different this time.”

My spidey-sense is telling me Qualcomm. The stock is down ~25% from 52-week highs. It’s broken linear support (green line) and sits right at its 50-day MA. And it was relatively strong on Wednesday. Looks ready for a breakout.

Buy to open the August 76 QCOM call option (symbol: QCOM190830C00076000) at or below $0.85.

Now, that last part in bold type is an option trade. A call option. Because the chart is telling me that QCOM is likely to rally nicely…

We’re in the Money…

There’s no need to get into the arcane numerology that makes up an option symbol. There are just three things you need to know about that instruction.

One: My readers are taking an upside trade on Qualcomm. 

Two: This trade will self-destruct next Friday (August 30) at the close of trading. (OK, it doesn’t actually self-destruct, but the contract we bought will expire on the 30th.)

Three: We are paying $85 per contract for this trade. I don’t know why the options people think it’s necessary to tell you the price is $0.85 when it will actually cost you $85. I mean, one option contract covers 100 shares of stock, so each share costs $0.85 to control. But you have to control shares in lots of 100, so the cost is $85. 

Now, Qualcomm was up around $1.60 most of Friday. That’s where it was when Real Income Trader subscribers got the trade alert. Qualcomm got a nice late-day rally, and those calls we bought finished the day at $0.98.

No, of course we didn’t sell. 

I don’t enter into an option trade unless I think we’re going to double our money or better. It doesn’t always work out that way; our last four trades were closed for gains of 75%, 72%, and 41%, along with a loss of -61%. But I’ve got a pretty good feeling on this one…

I’ve been trading options for 20 years. And I’ll tell you something I’ve learned: Winning options trades usually start out winners. That is, if your timing is right, you catch the stock while it’s moving in the desired direction… and it keeps moving.

The Timing Is Right!

I’ve also learned to keep my trading as simple as possible. There are traders out there who scan hundreds of charts a day, looking for the best setups. Not me. I run through that many charts and my eyes start to glaze over…

I prefer to keep a stable of stocks — say 8 or 10 — that I’m particularly bullish on for my trading. I’ve found that most stocks trade with their own rhythm, their own idiosyncrasies. I like to be able to watch a stock for a while before I trade it. Get in tune with it. I find that I tend to lose money when I trade a stock I don’t know well. 

So, Qualcomm. Very bullish on this stock. Did you know its chips will be in every single 5G device on the planet? Yeah. Huge.

And it has a forward P/E of 17 and PEG ratio of .78. I haven’t actually checked, but I bet it’s the only big tech stock with a PEG ratio under 1. 

Now, obviously, this whole trade war is weighing on Qualcomm. It does a LOT of business with Huawei. And it’s got a judge telling it to revise its licensing tactics, which caused a years-long dispute with Apple that only recently ended with Apple licensing Qualcomm chips.

If/when these issues get worked out, Qualcomm has at least 30% upside. And just a tempering of the fear that’s driven the stock lower gets my Real Income Trader subscribers an easy double today.

Until next time,

Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.