Tranny Flush – $IYT

by Dan February 26, 2016 2:06 pm • Commentary• Trade Ideas

In case you missed it, I am not a buyer of stocks after the 8% rally in the S&P 500 (SPX) from its 52 week lows made Feb 11th.  Regular readers know that I feel quite strongly that while the SPX might get back to the uptrend from its 2009 lows, it likely fails there, setting up for a re-test of the prior lows. And there is little support below for another 200 points (more on that here):

SPX 8 yr chart from Bloomberg
SPX 8 yr chart from Bloomberg

I also have little confidence in the year to date out-performance of many beaten up sectors like materials, retail and industrials (see some of our recent trades in XLB, XRT & GE here).

It’s my view that the U.S. economy is far closer to contracting than it is set for a meaningful acceleration, which is largely predicated on a fairly dim view of global growth (read here) and what I suspect will be a continuation of central bank induced confusion/panic that could rile risk assets in the near future (read here).

Transport stocks have had a fairly healthy bounce off of their lows, with the two largest components FDX & UPS (which make up nearly 20% of the IYT, the etf that tracks the sector) up 15% from their recent lows, I see a good opportunity to short this very economically sensitive sector that could see another leg lower, a re-test of 52 week lows.

I want to be very clear, from a near term technical set up, the chart looks fairly constructive, with the year to date chart threatening a breakout above the highs of the year:

IYT ytd chart from Bloomberg
IYT ytd chart from Bloomberg

Taking a slightly longer term view though, the recent break of the long term uptrend might have bulls of the sector concerned, as a re-test of that uptrend, just below $130 could see an airpocket, down to about $115, the 2016, and 2 year low, with little support below there till $100:

IYT 7 year chart from Bloomberg
IYT 7 year chart from Bloomberg

So What’s the Trade? 

Here is a trade I am considering early next week:

IYT ($133.50) Buy the April 130/115 put spread for $2.50
  • Buy 1 April 130 put for $3
  • Sell 1 April 115 put at 50 cents

Break-even on April Expiration:

Profits: below 127.50 with max gain of 12.50 at $115 or below

Losses: of up to $2.50 above 127.50 with total loss of 2.50 above 130, or less than 2% of the price of the etf

Rationale: The IYT has come back to its break-down level from early January, which was also a level the etf found support in late August. If the etf fails here at $134, then the put spread I detailed above offers a good risk reward to play for a re-test of the prior lows:

IYT 1yr chart from Bloomberg
IYT 1yr chart from Bloomberg