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One of my biggest themes heading into 2025 was that Magnificent Seven stocks would lag the market. Their heyday was marked by massive Fed and U.S. government stimulus, shutdowns and closures, and they generally benefited from conditions brought on by the COVID pandemic. 

The new administration seems to mark the end of that mindset as debt and deficits exploded. With austerity measures expected, it only makes sense that these companies’ earnings growth would moderate. 

If that’s the case, what impact would that have on the market as a whole?

The issue for the S&P 500 is that these stocks account for much of the weight by market cap of the index. 

If they are experiencing any sort of reversion toward their historical valuations, this puts long odds on the S&P 500’s performance coming close to anything like we’ve been used to in the past couple years. 

They led the market higher… and now they are a total drag. Here’s what to do about it…  

The Drag-nificent Seven 

How much of a drag? Here’s a breakdown in the percentage decline from their 52-week high for Mag 7 and several other key companies.

One of the corollaries that I’ve been drawing in anticipation of the current correction is, “if the market catches a cold, your stocks may catch pneumonia.” 

During the July correction, the S&P and Nasdaq declined around 8%to 13%. However, the average Nasdaq stock declined around 46%. 

My expectation was that another decline could yield a similar pattern.  

Understanding this is a major reason why profit-taking is the first consideration before hedging. 

All of this analysis is about understanding the stiffer headwinds the market faces, but this doesn’t help for anticipating a near-term low in the market. The reality is that the VIX3M closed at the same level as the VIX on Thursday. This is a sign that typically points to a near-term bottom. The bounce may last a few days or longer.

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The current dichotomy of “Magnificent Seven and meme stocks versus the rest of the market,” creates opportunities to go long. 

Two sectors that show relative strength are consumer staples and energy. 

We’re looking for a first-mover advantage by identifying option pulses or prints that could impact the stock price. 

Here are three that I thought were significant yesterday:

Option Pulse #1

Micron Technology Inc (MU)

MU faded after an attempt to rally on Wednesday. As the price was fading, there was some significant option activity that popped up that illustrates the near-term concern for semiconductor stocks following Microsoft Corp (MSFT) AI spending news last week and NVIDIA Corp (NVDA) earnings response on Thursday. 

• MU 4 APR 25 $75 puts 

The puts bought yesterday are illustrative of a big decline in the share price heading into the earnings announcement. We may see some selling down to $87.50 ahead of the earnings announcement, but the earnings may help move the stock below its major support at $83.50. 

Option Pulse #2

Conoco Phillips (COP)

COP has been testing its December support near $95 for most of February. With Oil futures (/CL) trading near the lower end of its range as we enter spring, the price may be poised to bounce and head back toward the upper end of its range near $80. That means that COP may be ready to break out from its lows and Thursday’s option activity certainly points to that possibility.

• COP 28 FEB 25 $100 calls

While this is a short-dated expiration, it does carry a more significant impact as the strike moves ITM. However, the bigger indication is that this stock is oversold and money is looking to move back in. There is a major resistance level at $102, but a breakout above that level would point to $105 or maybe even $115 if oil prices remain above the key support level of $67.

Option Pulse #3

Kraft Heinz Co (KHC)

KHC is a Consumer Staples company that broke out in the past couple weeks. It’s also in a sector that has been outperforming in the past several weeks. The rotation away from cyclicals to staples is something that was signaled at the beginning of February and was one of the signals for some degree of bearish expectations in the market. 

• KHC 28 FEB 25 $31 calls 

KHC is another short-dated expiration but again, is indicative of an immediate move in KHC. That being said, it can be used for continued strength in staples and for a bullish move in the market generally. The post-earnings move may be the first wave in a bullish trend reversal. The first wave in a breakout is something I call a “seed wave.” Measuring the seed wave gives a target near $35 and the next level is near $40.

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Incorporating option pricing, option pulse activity and technical setup can create a good environment to consider this type of trade - what I call the “In/Out Spread.”

Alert Setup

Here’s the breakdown of a KHC In/Out spread:

• Buy KHC 17 APR 25 $37 call option

• Sell KHC 17 APR 25 $39 call option

The trade would be put on for around a $1.00 debit, creating a 1:1 risk/reward. Not the best pricing, but it is a bullish in/Out spread where it’s difficult to get amazing prices on stocks like this one. The exit would be $1.30 (30% gain) within three days after the trade and $1.55 (55% gain) thereafter. Look to close the last week for a partial gain or loss, and don’t let it expire in-the-money (ITM). 

If you’re trading the stock, a stop could be placed at $29.73 with a $35 target price. With an entry price near $31.75, it provides a reasonable risk-to-reward.

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