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Using Nike to Increase Our Focus on Consumer Stocks

John Jagerson and Wade Hansen

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Last week, traders were obviously a little disappointed Federal Reserve Chair Jerome Powell didn’t provide a forecast for further easing after this rate cut. Once that stress seemed to pass, President Trump swooped in and sent prices tumbling down with a tweet about more tariffs on Chinese goods.

Specifically, he said the U.S. will implement a 10% tariff on the remaining $300 billion of Chinese goods beginning on Sept. 1.

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Earlier last week, it looked like the trade dispute between the United States and China was getting back on track as negotiators from both countries met to restart talks. Now, it looks like we’ll have to keep waiting for a resolution to the situation.

This announcement wiped out the bullish bounce the S&P 500 was experiencing in early trading on Thursday, and it continued pushing stocks down on Friday.

With all that being said, we’re recommending a bullish trade on Nike (NYSE:NKE) because consumer stocks are still looking good.

NKE Shows Consistent Growth

We share some of the Fed’s concerns about the status of the economy, but there are also some real bright spots as well. Hiring, borrowing and consumer spending have continued to be very strong. This should help us profit from consumer stocks as the fall shopping season starts to heat up.

From a fundamental perspective, NKE has consistent trends in top line, bottom line and cash flow growth, which is always our primary focus when evaluating a position. We have been watching for signs of weakness among NKE’s peers, but outside of Under Armour, Inc. (NYSE:UAA) — which suffers from unique mismanagement and market problems — industry trends look solid.

The most important risk at this point is that NKE’s costs continue to rise and outstrip sales growth due to the trade disputes between the U.S. and China. Even though the “trade war” is picking back up we remain optimistic.

Heading Higher Over the Long Term

If we look at a weekly chart for NKE, we can see that since the trade war with China began, the stock has generally been heading higher.

Daily Chart of Nike (NKE) — Chart Source: TradingView

The weekly chart above covers the period just before the United States International Trade Commission (USITC) recommended global safeguard restrictions on solar panel and washing machine imports. Trump acted on the recommendation in January of 2018, effectively kicking off the trade war. For a complete timeline, see this post from the Peterson Institute for International Economics (PIIE).

Despite escalating tensions over the last year, NKE has remained above its 50-week moving average for the most part.

If we turn to the daily chart, we can see that the stock dropped after President Trump announced new tariffs.

Daily Chart of Nike (NKE) — Chart Source: TradingView

However, NKE could find a bottom at around $79 and start to head higher. If it drops below that level, it may bounce up off support at around $77. The volatility from the trade news has pushed up the premium for NKE put options, so selling a put could help us collect additional income.

If the stock continues to drop and we end up being put the stock, we would have an excellent opportunity to sell covered calls while we wait for it to recover. And we think NKE will recover. Over the past two years, NKE has proven itself capable of thriving, even during a trade war. With the U.S. consumer looking so strong, we wouldn’t mind being put the stock.

To find out which NKE puts we’re selling — and to get access to our full portfolio of income-generating trades — consider signing up for risk-free trial subscription to Strategic Trader today. 

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.

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