As we shared in yesterday’s Tematica Investing, several stock market indices are either in overbought territory or are seriously flirting with it. Not surprising given the sharp climb in the market over the last few weeks.

While most investors have liked the recent tally, as we do, current valuations makes it a challenge to put new money to work. For example, following the overwhelmingly positive data for digital shopping spinning out of the Thanksgiving — Cyber Monday period, we were contemplating adding a January call option position in United Parcel Service (UPS), but as you can see in the chart below the shares have been overbought since the outcome of Election Day 2016.

As we move into December, we’ll capitalize on an opportunity to add UPS calls should such an opportunity present itself. It’s not just the holiday shopping season, but the post-holiday returns and barn burner sales that follow we’d want to capture, hence the January time frame we’re looking ahead to on UPS.

As we mentioned above, the market is in over bought territory and it’s not lost on us that yesterday’s OPEC deal that sent oil prices soaring is going to have a ripple effect. We also have the pending  Italian referendum vote this weekend, and so far the polls are eyeing a “no” vote. Of course, we saw how well the polls predicted the Brexit and 2016 presidential election outcomes.

If the polls are right and we see a “no” vote, Italian stocks and bonds will take a solid hit. Italian bank stocks will accelerate downward, which will put the European Central Bank in the hot seat. Italian Prime Minister Mario Renzi will be pressured to resign, (unless the win is by the smallest of margins) and the Italians will find themselves back at the polls. The euro will weaken and European banks as a whole will likely take a hit, while the dollar will further strengthen with U.S. stocks and bonds gaining an additional tailwind as investors flee from euro uncertainty. Longer term, global trade and the European economy will take a hit.

If we get a “yes” vote, Italian bonds and banks are likely to rally as will the MIB (the Italian stock index), the euro will likely strengthen relative to other currencies, including the dollar, and US stocks are likely to take a breather. With such a binary outcome, we’re inclined to hold off adding any new positions.

More Snow and Cold Temps Mean XLU calls are still Buys

Over the last week, both of our Utilities Selec Sector SPDR ETF call positions have ebbed and flowed as temps in the northeast warmed up the last few days. Given the prospects for continued cold weather that should bring snowfall to the upper northeast over the next few days and multiple storms that will bring chilly weather to the northwestern US, we remain bullish on both the Utilities Select Sector SPDR ETF (XLU) January $48 calls  (XLU170120C00048000) as well as the Utilities Select Sector SPDR ETF (XLU) January $50 calls (XLU170120C00050000). Rest assured, if things change in the coming days, we’ll be sure to post a special alert just as we’ve done in the past.

A Look at the Recently Added MKC Calls

The McCormick (MKC) December $95 calls (MKC161216C00095000) we added last week climbed nicely coming out of the holiday weekend but traded off yesterday in very thin trading volume. Despite that sell-off, McCormick has yet to announce its next quarterly dividend payment. Remember, part of the thesis behind adding the calls is the company’s hefty track record of boosting its annual dividend in late November – early December. That potential increase aside, we continue to like the underlying shares during the seasonally strong period of demand for its extracts and spices.

• At current levels, the MKC December $95 calls are a Buy given the likelihood the company’s Board once again approves another dividend increase. 

Keeping a Close Eye on Alphabet

Finally, we’re going to hold steady with our  Alphabet (GOOGL) January $800 calls (GOOGL170120C00800000) position even though it’s taken a few lumps this week. With online shopping popping year over year, Alphabet’s search and advertising business are strong beneficiaries as is the company’s Google Shopping offering.

If the current weakness in the calls persists, we’re inclined to scale into the position once we know the outcome of this weekend’s Italian referendum vote. If things look favorable between now and next Thursday, we’ll get a special alert out to you.