Err on the Side of Selling Drug Stocks

 | Dec 05, 2013 | 2:46 PM EST
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So we have to have to have to sell the drug stocks, do we? Should we short them? Why not? What's going to happen? There can't be a squeeze, because these stocks don't trade like that. But there can be a quick 4%-to-5% decline, right? A strong employment number would put them out of favor -- because, after all, who wants their boring consistency when there'll be cyclicals to will report terrific numbers?

Oh, and how much of their performance is because of better-than-average yields? They are the natural candidates to go down, even more so than the foods and perhaps more so than the real estate investment trusts and the master limited partnerships. Because they've been relentlessly hammered already -- although I certainly don't want to start accumulating either of those groups into weakness.

So, is there anything wrong with this thesis? Yes: It's so darned obvious that if we get a strong number, and if rates go higher, it is always a possibility that we'll say, "OK -- the big, bad event that we have been seeking is at last over. What's been thrown away that we like?" It's also possible that these stocks have been so heavily shorted that, if we don't get a strong number, they will be the first where people will return.

That said, a trader should err on the side of selling and shorting the group, I think. Quite simply, the stocks are up huge and the interest rate competition will be very compelling, given that the stocks aren't yielding much at all these days.

We can lump in the consumer packaged-goods stocks, too: We won't want to own these shares ahead of tomorrow's session, either, if we are putting our trading hats on.

What's the point of owning Colgate-Palmolive (CL), which has a little yield? What's the point of sticking with Clorox (CLX), which doesn't have a huge up year going for it?

I typically don't like to short so many of these great American companies. But I think if you pick up puts on the Health Care SPDR (XLV), or the Consumer Staples Select Sector SPDR (XLP), you might be able to eliminate some of the individual risk and get protection that you might need.

I know it's hackneyed. I know it shouldn't be that easy, and that you have to be suspect because of this. But it sure makes sense if you are calling the "over," as my friend and writing colleague Matt Horween has suggested. It's cheap insurance against what could be a treacherous 3% to 3.5% -- yep, that big -- leap in the 10-year U.S. Treasury. Such a move would indeed cause a shock to parts of the stock market during that breakaway run.

No, I am not calling for 3.5% immediately. But bonds overshoot, and that's what they could do on a real strong number.

Needless to say, you can always just buy puts on the iShares Barclays 20+ Year Treasury Bond (TLT), like the 13,000 December 101 contracts that have traded just today.

Hey, $0.56 can give you a lot of coverage. Makes too much sense not to do.



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