The "Machinery Tools" sector has been outperforming
Our internal sector scorecard, compiled weekly by Schaeffer's Senior Quantitative Analyst Rocky White, helps identify underloved sectors for our
contrarian trading strategy. Ideally, we're looking for sectors that have been performing well from a technical standpoint, yet pessimism remains high. This time around, the "Machinery Tools" sector was near the top of the list, likely thanks to a recent after-earnings rally from Deere stock. After taking a closer look at the sector, three stocks that could present prime opportunities for options traders are
Dover Corp (NYSE:DOV),
Terex Corporation (NYSE:TEX), and
Snap-on Incorporated (NYSE:SNA).
DOV Stock Finds Chart Support
Since the beginning of the year, Dover stock has seen strong support from the $76 area, which is a 61.8% Fibonacci retracement of its descent from record highs in July 2014 to its January 2016 bottom. In fact, DOV shares have been trending higher since hitting that multi-year low, touching a two-year high of $84.40 on May 22. Last seen trading at $83.47, the equity sports a year-over-year advance of 25.2%.
Options data reveals bearish tendencies from traders, though. Dover has a 10-day put/call volume ratio of 2.67 across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which ranks above 66% of readings from the past year. This pessimism could unwind and act as an upside catalyst for the shares.
Bearish or bullish, it's a good time to buy DOV options, based on the stock's Schaeffer's Volatility Index (SVI) of 20%, which stands just 3 percentage points from an annual low. This means near-term options are inexpensive, from a historical volatility standpoint.
Short-Term TEX Options Are Relatively Cheap at the Moment
Terex stock has added almost 35% over the past year to trade near $34, touching a more than two-year high of $36.43 on April 25. More recently, TEX shares have found strong support from their 50-day moving average, as well as their year-to-date breakeven mark.
Options traders have remained bearish, however. The stock has a 10-day put/call volume ratio of 1.62 across the ISE, CBOE, and PHLX, outranking 78% of comparable readings from the past 52 weeks. Meanwhile, near-term TEX options are offering an affordable buying opportunity, based on Terex stock's SVI of 32% -- just 18 percentage points from an annual low.
Short Interest Builds on SNA Stock
Finally, Snap-on stock has pulled back from its early 2017 record highs, but seems to be finding support from the familiar $160-$162 area -- a region that served as a ceiling throughout most of 2016. This level is also home to SNA's 320-day moving average. At last check, the stock was trading at $162.29.
Like its sector peers, put buying has been popular on SNA, albeit amid relatively low absolute volume. The shares have a 10-day put/call volume ratio of 1.77 across the major options exchanges, good enough to rank in the 70th annual percentile. This skepticism is seen outside of the options pits, too, with short interest up 30% since February to 3.5 million shares, or 4 times SNA stock's average daily trading volume. A capitulation from some of the weaker bearish hands could boost the stock.
There's rarely been a better time to
buy options during the past year, too. Snap-on stock has an SVI of 18%, which ranks in just the 8th percentile of its annual range.