Appetite for reconstruction?

01/20/21
  • GIS bounced last week after hitting 40-week low
  • Move tested Sept. 2019 highs
  • Calls trading at steep discounts to recent levels

When the Pfizer and Moderna vaccines jumpstarted hopes of an economic rebound and a return to pre-pandemic lifestyles late last year, many of the “stay-at-home” stocks that had soared during the crisis gave back some of their stratospheric gains.

Although their moves weren’t as dramatic as some, prepared-food stocks—many of which were not exactly high-fliers before the pandemic—got a bullish bump much of last year as people (initially) hoarded supplies and then got reacquainted with their kitchen tables as lockdowns limited their dining options.

For example, consumer food giant General Mills (GIS) rallied 40% from March 23 to August 4—not bad, considering that right before the COVID sell-off the stock was trading roughly 24% below its 2016 all-time high. But like many stocks that appeared to benefit from lockdown, GIS pulled back the past few months as investors envisioned a light at the end of the pandemic tunnel. The following weekly chart shows GIS hit its lowest level since April when it tumbled to $53.96 last Monday—an 18% retreat from its August high of $66.14:

Chart 1: General Mills (GIS), 5/22/17–1/19/21 (weekly). General Mills (GIS) price chart. Big-picture retracements.

Source: Power E*TRADE


Even before stay-at-home stocks were receiving renewed attention amid the latest wave of lockdowns, some market watchers were arguing that many of the consumer habits and brand loyalties formed during the COVID crisis were likely to have staying power. More to the point, with 15% of US restaurants still closed, some analysts think people could still be doing more eating at home for quite a while yet, which could be good news for companies like GIS.1

The question is whether traders think so. On that score, there may be a few things the trading crowd is looking at, although the size of GIS’s retracement may be the most significant. In the past, the stock has more often than not rebounded after weeks like last week, closing higher eight weeks later 65% of the time, and gaining more than twice as much, on average, as it typically does in an eight-week period.2 (Last week GIS bounced more than 4% by Friday.)

The weekly chart also shows the most recent retracement dropped prices to a significant former high (September 2019), very similar to the stock’s test of its September 2018 highs when it pulled back last year.

A daily chart shows last week’s sell-off marked a breakdown below the stock’s September and November lows—a former support level traders may now be watching to see if it functions as resistance:

Chart 2: General Mills (GIS), 9/14/20–1/19/21. General Mills (GIS) price chart. Test prep?

Source: Power E*TRADE


Those who feel a solid move above this potential resistance bodes well for further upside may also be looking at GIS call options:

Chart 3: GIS Feb. $55 call option, 12/17/20–1/19/21. GS Feb. $55 call option chart. -62% from a month ago.

Source: Power E*TRADE


The GIS February $55 call option shown here, for example, was trading for less than half of what it cost a month ago. While traders looking past the next few weeks would likely consider trading more distant contract months (to avoid the accelerated loss of value that can occur in the final few weeks of an option’s life), the chart is representative of how much GIS calls have moved since mid-December.

Market Mover Update: Editas (EDIT) fell more than 8% intraday yesterday, trading to within $2 of the key price zone discussed in “Double helix, double top.”

Today’s numbers (all times ET): Mortgage applications (7 a.m.), NAHB Housing Market Index (10 a.m.), Presidential inauguration.

Today’s earnings include: Alcoa (AA), United Airlines (UAL), U.S. Bancorp (USB), Procter & Gamble (PG), FuelCell Energy (FCEL), UnitedHealth Group (UNH), Teradyne Inc (TER), Morgan Stanley (MS).

 

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1 Barron’s. 5 Food Stocks to Buy in 2021. 1/18/21.

2 Reflects General Mills (GIS) weekly closing price data, 2/13/84–1/19/21. “Weeks like last week” refers to a week that 1) trades below the lows of at least the previous 40 weeks, and 2) trades at least 3% below the previous week’s low. Supporting document available upon request.

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