Just hours after I delivered a trade recommendation to hedge the coronavirus market drop, markets took another 3% to 4% hit. That's how fast shares are moving right now.
There are a lot of unknowns when it comes to what's ahead for the coronavirus market impact. But using my history of trading in the stock market, I've found there is a sector that often leads the market lower in similar circumstances as we have today: the financials.
I've been focusing on this group for the last week. A closer look shows us that there are a couple of companies within the financial sector that have actually not been making new highs, have been trading level since December, and are now starting to lead the rest of the sector down.
These are what I refer to as my "Worst in Breed" stock picks as opposed to my usual "Best in Breed" picks. A "Worst in Breed" pick is a stock leading a hard-hit sector even lower.
The coronavirus is going to have a global impact on the economy, which we'll see play out in the financials. These stocks are intertwined with all the large economies. There will be continued weakness in this sector.
That's why today, I'm going to show you a way to play the entire sector's drop with two trades that are so easy to execute, even my mother could do it.
Two Simple, Fear-Hedging Plays
The first step to take is to buy an inverse ETF. These are ETFs that move in the opposite direction of the overall market or a specific sector. They're a great hedge to own when markets are falling.
In this particular case, it's going to be the ProShares Ultrashort Financials (NYSE: SKF). You'll want to place a limit order to buy SKF for $15.50.
SKF is the inverse play to the Financial Select Sector SPDR Fund (NYSEArca: XLF). As XLF continues to go lower, SKF will go higher. This makes it a great and easy way to hedge against the falling financials.
Now, when I start to look at my "Worst in Breed" company in the financial sector, one in particular is looking at me straight in the face and saying that it's going to run into problems as we go through the next three to six months.
That company is none other than JPMorgan Chase & Co. (NYSE: JPM).
Now, JPM was trading around $130 and moved back down to $122 or so. The reason that it's bouncing right now is because we're seeing a "dead cat bounce" in its stock price. Once it gets back up to around $128 or $130, that's when it's time to short it.
Over the next three to six months, my price target for JPM is down around the $110 level, so what you want to do is buy a July 17, 2020 $120 JPM put (JPM200717P00110000) using a price of $7 or less.
Leveraging the drop in JPM could hand you a potential 75% to 125% profit on that sell-off.
We'll continue watching as the financials get tested over the next couple of months and the markets continue to struggle and move lower.
This recommendation is part of our Fast Profits with Money Morning video series, giving you a new trade every week. Click here to automatically sign up to get all future Fast Profits trades sent directly to you, free of charge.
About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Straight-Up Profits. He also contributes to Money Morning as the Quant Analysis Specialist.