2 Dow Stocks To Watch After A Fed Rate Hike

McDonald's stock could climb to a record high next week

Managing Editor
Dec 13, 2017 at 12:53 PM
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The Federal Open Market Committee (FOMC) kicked off its highly anticipated December meeting yesterday, and the central bank is widely expected to announce a rate hike later this afternoon. Yesterday, we discussed some blue-chip stocks to avoid. Today, we decided to take a look at some of the best stocks to buy when the Fed hikes interest rates, with McDonald's Corporation (NYSE:MCD) and 3M Co (NYSE:MMM) coming in as the only Dow stocks to make the list.

Best Stocks Fed Hike

McDonald's Stock Poised To Keep Climbing

Since 2015, the Federal Reserve has hiked interest rates four times, the last coming in June. If past is prologue, McDonald's stock could advance the next week, per data from Schaeffer's Senior Quantitative Analyst Rocky White. The security has been higher a week after the last four rate hikes, and average a gain of 1.02%. 

McDonald's stock has added over 42% year-to-date, and the shares' channel of higher highs has been supported by its 30-day moving average. The equity touched a record high of $174.44 on Dec. 6, boosted by the company's new Dollar Menu. At last check, MCD stock was up 0.8% to trade at $173.58, and if a rise of similar magnitude were to occur next week, MCD stock could find itself trading around $175, a fresh record high.

Options traders, though, have remained bullish. The security has a 10-day call/put volume ratio of 1.41 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which ranks in the 83rd percentile of its annual range.

Digging deeper, the January 2018 175-strike call has seen one of the biggest rises in open interest during the past 10 days, with 6,088 contracts added. Data from the major options exchanges shows a mixture buy-to-open and sell-to-open activity at this strike. The "vanilla" traders who bought to open the calls are expecting the stock to climb above this strike before the early weeks of 2018, and those writing the calls see the overhead $175 level as offering short-term resistance.

3M Stock Looking To Renew Ascent To All-Time High

3M stock also tends to climb a week after a Fed rate hike. The equity has been positive all four times, going out one week, and averages a gain of 0.93%. MMM stock is up 34% year-to-date, and touched a record high of $244.23 on Dec. 4. At last check, it has added 1% today to trade at $238.93.

Earlier today, the Dow stock received two price target hikes, to $208 from $207 at J.P. Morgan Securities, and to $215 from $209 at RBC. Analysts are also decidedly pessimistic, with eight of 12 offering up "hold" or "strong sell" ratings. Should the blue chip once again pursue record highs, it could prompt analysts to re-think their bearish outlook.

In the options pits, 3M boasts a Schaeffer's put/call open interest ratio (SOIR) of 3.30.  Not only does this show that put open interest more than triples call open interest among contracts expiring within three months, but the ratio ranks 6 percentage points from a 52-week high. This means such a put-skew is very unusual.

Digging deeper, the December 230 put saw the largest increase in open interest during the past 10 days, with 2,913 contracts added. Data from the major options exchanges shows a mixture of buy-to-open and sell-to-open activity at this strike.
 

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