Buy Retail, Pharma, Health-Care on Dips

Last week's headline story was the Dow Jones Industrial Average on Jan. 25, 2017, finally passing, and holding the 20,000 level for the first time. That 30-stock index held on to that milestone through the end of the week. Percentage-wise, the tech-heavy Nasdaq had an even better week. Many traders also noticed when the Jan. 27, 2017, Thomson Reuters Insider Sell-Buy ratio posted its most bearish reading in a very long time. Company officers and directors typically receive large numbers of shares through compensation plans and incentive stock options. They almost universally sell more shares than they buy on the open market. Thomson Reuters calls their insider signal as bullish when the ratio of shares sold vs. bought is under 12. Conversely, the indicator is deemed bearish when insiders dumped more than 20 shares compared with their level of open market purchases. Last week's number surged to an alarming ratio of 59:1, the highest since early 2014. Four of the five previous clearly, but less violently, bearish readings (blue circles below) preceded short but noticeable market pull-backs. (See chart below.) The late July 2016 bearish signal was unusable as it came slightly too late to help traders avoid a selloff, which had already occurred. Those correlations suggest we might be in for a short-term decline. Note, though, that longer-term investors should have welcomed those weeks -to-months pauses as chances to enter positions at better prices. After all, DJIA 20,000 represented an all-time high. Thus every previous pull-back in history proved to be temporary. Invoking the memory of the mid-January 2014, the insider sell/buy reading was the order of the day this past weekend. Perhaps the bigger story should have focused on the coming opportunity to buy the dip. The chart below shows the Thomson Reuters Insider Trading Ratio from the year ended Jan. 31, 2014. That year's bearish selling spike did portend a painful two-to-three-week decline in the broad market. By August 2014, though, just six months later, the market was substantially higher. A late-September-to-early-October collapse did not prevent the indices from going on to what were then new highs by mid-December 2014. What are the most hated industry groups today? The answer? Retailers (ex-Amazon ) and health-care/pharmaceuticals. Retail is out of favor on worries about border taxes on imports and the slowdown in mall-based traffic. Drug companies and health-care firms are under fire from D.C. regarding price increases. When you see the facts, last year's retail sales numbers, after a poor January and February, rebounded to finish 2016 at an all-time high pace. High-quality, low-debt names like Williams-Sonoma , Urban Outfitters , Ralph Lauren , and deep discounters Dollar General and Dollar Tree look like good candidates for buying on weakness. Demographics will continue to favor health-care and pharma. Bad news appears to be already discounted. Political risk has pushed stocks like McKesson , AmerisourceBergen and CVS Health to levels where premiums on sales of Jan. 2018 and 2019, expiration date put options are quite attractive. Selling one- or two-year expiration date puts allows plenty of time for the current headwinds to dissipate. All the companies are highly profitable and likely to be worth more down the line than they go for presently. Writing any of the near-the-money options listed above would provide a generous margin of safety from already inexpensive trade inception prices. They offer excellent probabilities for gains.

Buy Retail, Pharma, Health-Care on Dips

Demographics will continue to favor health-care and pharmaceutical companies.

Columnist Conversation

This Weekend on Real Money

Thursday Morning Fibocall for 10/14/2021

Wednesday Morning Fibocall for 10/13/2021

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.