Now today, I’m discussing market memory as a powerful tool for trading the right stocks and their options.
The markets have memory, so to speak. And stock indexes and individual stocks often trade within those memories.
“Memories” make the patterns that I love to trade so much.
So whether a trader is fundamentally based, or, like me, technically based – having a good sense of a stock’s history is vital to identifying the better trades to make.
In my Money Calendar advisory, I provide a historical background for trades. I can look back over several years – and even narrow it down to individual weeks and days – to see the average bullish or bearish moves for most stocks.
And whether history repeats or just rhymes, knowing the calendar propensity for gains makes for an even more compelling case for stocks I’m considering for a long position.
In fact, despite the rough start to the week, the days from Dec. 13-17 have demonstrated, historically, to be bullish for the stock market in general at a much higher percentage than bearish.
Even better, I’ve found one stock that is already doing well both on and off the charts leading into the new year.
The Right Stock by the Calendar
Feathering nests is increasingly the trend for US households. Be it inspired by the myriad of home improvement television shows, or just the continued desire to live better at home – US households continue to spend more to refurbish, expand, or repair their homes.
And it shows in the past years via the US Home Improvement Expenditures Index, derived from US retail spending data for a collection of goods and services.
US Home Improvement Expenditures Index – Source: Bloomberg
The index has been firmly on the incline, with the sharp drop in March-April 2020 due to virus lockdowns briefly shutting down spending. That trend quickly reversed, though, and spending soared even more, with help from many a quarantine reno project.
And with the real estate market nearly frozen in some areas of the country, there’s even more incentive to feather the nest you’re stuck with right now.
That said, one stock that has my attention in this market – and that has a great calendar set up historically over the past 10 years – is Home Depot (HD).
Home Depot’s revenue appears highly similar to overall US home improvement spending.
And below, you can see the blue chip’s revenue over the past five years that, on a compound annual growth rate (CAGR) basis, averaged 11.33%.
Home Depot Revenue – Source: Bloomberg
Meanwhile, HD’s stock charts have a history that mirrors that climbing revenue – at least around this point of the year.
Here’s the historical calendar for Home Depot’s stock, per my Money Calendar Protools.
You can see that Dec. 13 to Jan. 21 has been a historically bullish season for HD stock over the past 10 years, with this period ending lower just once – back in 2015.
As such, earlier this week, I offered my Money Calendar Pro traders what I call a Green Loophole Trade – or a call debit spread.
It involved buying to open a January 21-expiring call option at a strike near the HD stock price at the time.
But to limit my risk on the trade – which is the initial premium paid – I simultaneously sold to open a higher-strike call in the same series.
The profit potential of the debit spread is less than if I’d bought the at-the-money call outright, but the sold side of the spread also lowered my breakeven on a bullish move from HD.
Had I wanted to only buy calls on a stock, I might’ve perused today’s Power Profit Trades Watchlist featuring stocks with Cheap Implied Volatility (IV)…
So, kids, that’s your Power Profit Trades lesson for today!
— Tom Gentile
Source: Power Profit Trades