I have to admit being very ambivalent about this market. On one hand, there is every reason to expect a frustrating period of consolidation, as I have written in recent weeks . The reason is that short-term momentum on the S&P 500 remains bearish as its 50-day moving average continues to decline.
But on the other hand, I continue to believe that equities remain undervalued and underowned, which keeps a lid on selling. Companies are also sitting on piles of cash and have continued to improve their balance sheets despite issuing record amounts of debt.
So my head tells me to expect that the SPX will churn in a range while continue its gradual upward trajectory. But my gut says we could get a decent rally that no one has priced in.
Either way, in today's column I want to identify some potential trades for either a sideways market or a bullish one. As always these are initial ideas rather than outright recommendations.
JP Morgan (JPM): A crash from the mid-$40s to the low-$30s has made this banking behemoth thoroughly attractive, regardless of that $2 billion credit loss. In a few months, people will forget all about that minor blemish and regret not buying one of the best banks in the country far below book value. (JPM currently trades for 0.7x book.) Puts are also trading at a premium compared with the calls, which means the market remains worried about the name. Investors may want to exploit this by selling the August 31 puts for $1.05 and buying the August 37 calls for $0.97. They'll collect a small credit and stand to earn giant leverage on a push toward that bearish gap. (See our Education section for more on put selling .)
Yahoo (YHOO): Like an oil tanker turning, this tech giant is lumbering into a bullish setup as its 200-day moving average begins to ascend. It's outperformed the broader market in the last three months, something it hasn't done in years. There are lots of moving pieces in this name as it unloads shares in Alibaba and looks for a new CEO, but the relative strength is the main consideration in my book. It could be the sign of good things to come, and YHOO is especially worth a look if it goes back to $15.
Nu Skin Enterprises (NUS): This stock has received surprisingly little attention considering its 500 percent rally between early 2009 and early 2012. It's now had a pullback and has double-bottomed around $40. A push back toward $50 or higher seems entirely possible before the next earnings report, which will probably in early August.
Vitamin Shoppe (VSI): This company is in the midst of a secular growth trend after going public in late 2009. Its financials have been stellar, with good same-store sales growth, a well-managed expansion, and increasing margins. Minor worries about dietary supplements last month did little to damage its bullish uptrend. VSI looks a bit like Lululemon in late 2010. LULU, after all, had already more than doubled and was near all-time highs, but it would still more than triple in the next 18 months.
Smart Balance (SMBL): This little-known small-cap company has repeatedly beaten estimates and is now adding gluten-free products to exploit a fast-growing subset in the food market. SMBL has already made a quick move from under $6 to over $7, so it's worth building a position incrementally while knowing that it may pull back to $6.60 or simply take off from here.
(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of June 13.)
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