It’s often hard for investors to rationalize, but bad economic news is sometimes “just what the doctor ordered” for the market. And that was the case last week as housing numbers again disappointed, consumer sentiment hit a record low, and perhaps for the first time in months, an inflation-related data point may have cooled off. What this means is it appears the economy is slowing down, which could allow the Federal Reserve to slow down the speed at which it raises interest rates.

Cabot Profit Booster Issue: June 28, 2022

Market Overview
It’s often hard for investors to rationalize, but bad economic news is sometimes “just what the doctor ordered” for the market. And that was the case last week as housing numbers again disappointed, consumer sentiment hit a record low, and perhaps for the first time in months, an inflation-related data point may have cooled off. What this means is it appears the economy is slowing down, which could allow the Federal Reserve to slow down the speed at which it raises interest rates.

All that being said, by week’s end the S&P 500 had risen 6.5%, the Dow gained 5.4%, and the Nasdaq surged higher by 7.5%.

The Stock – JD.com (JD)
Why the Strength
JD.com is one of China’s largest online retailers, as well as the country’s biggest internet company by revenue, with offerings ranging from fresh food and apparel to electronics and cosmetics. With China’s two largest cities just emerging from a lengthy Covid-related shutdown, deliveries for discretionary retail goods (like PC devices and apparel) are expected to jump in the months ahead based on pent-up demand. While JD stands to benefit from this anticipated trend, it’s also planning a foray into on-demand food delivery in a market that should provide a significant new revenue stream for the company (a reason for the strength).

Additionally, sentiment for JD was recently buoyed when China’s government announced new economic stability measures, along with relaxed regulatory measures for tech-oriented companies, which is a big reversal from the prior couple of years. Q1 results, reported in May, were hindered by lockdowns but still weren’t awful—revenue still surpassed expectations by rising 11% from a year ago while earnings rose 5%. By segment, retail sales rose 17% to $33 billion, while revenue from logistics climbed 22% to $4 billion, and a major Wall Street bank to maintain a “buy” rating on the stock and up its expectations for JD’s sales.

Meanwhile, last week the company reported positive results from China’s “618” shopping season (which covers the first 18 days of June and is the nation’s second-largest consumer shopping event); JD said it sold $57 million in goods during the event, up 10% from last year, in another sign demand is just starting to ramp. Growth should accelerate from there as parts of the country re-open; analysts see things picking up in Q3 and see earnings up more than 50% in 2023.

Technical Analysis
JD slumped with the rest of China’s broad stock market, peaking at 108 in February 2021 and hitting a nadir slightly above 40 this March, where it and the entire sector found massive-volume support. The last 14 weeks have seen JD etch out a bottoming pattern, with a higher low (at 50) in May and a solid five-week rally that’s seen shares hold above their 50-day line. There’s plenty of overhead, of course, but we like the setup and think a nibble here could work. Stop – 54

The Covered Call Trade
Buy JD.com (JD) Stock at 66, Sell to Open July 66 Strike Calls (exp.7/15) for $3, or a Net Price of 63 or less

Static Return: $300 per covered call (4.76%)

Breakeven: 63

Covered Call Return (if assigned): $300 per covered call (4.76%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 63 or less. (In this case 66 minus 3 = 63. Or another example is you could pay 66.25 for the stock and sell the call for 3.25, which also equals 63)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on July 6, 2022.

Analyst Bio

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.

Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.

After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.

Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.