Tuesday, August 4, 2015

Moving with the trend

Jon Haghayeghi | Twitter@LoneStarQuant

It has been a busy month - Greece struck a deal, U.S. companies have reported earnings, and China has banned short-selling to curb the recent 30% drop in equity prices. Many american investors are buying dips, recognizing that there has not been a 10% drawdown in the U.S. markets in the past four years and the trend can continue as rates remain low as the Fed holds 4.5 trillion in securities. With that in mind, let's take a look at a couple potential long trades.

Ace Limited has rallied ten years in a row during the three months following August. Although the stock has a beta of 1.01 (nearly perfectly correlated to the broad market), has rallied the past several weeks despite softness in the equity markets. Based on historical data, we expect the stock to rally about 8.5% over the next three months.

Nike (NKE) is a large-cap that has historically traded well in August and September.  The historical average gain is 8.5% for the 56 days starting August 5th. 

Both of the patterns listed above are great candidates for premium selling and have liquid option chains. I encourage you to get creative - there are ways to limit your downside risk without setting stop-losses. Stay smart and trade safe!