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Stick with this sector ahead of earnings season, says experienced options trader

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This sector your best bet ahead of earnings season, trader says

Stick with the staples.

That's what Danielle Shay, director of options and trader specialist at Simpler Trading, is recommending to investors as Wall Street gears up for its next earnings season beginning in mid-October.

"What we've seen over the course of the last six or seven weeks is ... these high-momentum growth stocks and industry groups that are just slowly selling off, so that includes FANG, particularly, Facebook, Amazon, Netflix," she said Tuesday on CNBC's "Trading Nation." "You also have cloud computing, cybersecurity and the hot IPO market that's all getting sold off. And so while the stock market is sitting around those highs, you've really just lost that momentum."

In response, Shay suggested rotating out of these groups as the tidal wave of earnings approaches.

"I've pulled out of those high-growth momentum stocks and I'm currently focusing on gold, bonds and I also love consumer staples as well as utilities," she said. "These value areas of the market have not only remained strong the majority of this year, but particularly right now."

Shay highlighted the Consumer Staples Select Sector SPDR Fund, ticker XLP, as one of her top picks for investors, saying that she also trades options on that exchange-traded fund.

"I have a target of about [$]63.50 on XLP, and I also love Costco as well as Estee Lauder for two really great relative-strength names within this sector," Shay said.

That's because as high-growth names lose steam, these investments could very well pick up the slack, she said.

"We've seen XLP hold up very well, particularly throughout August when a lot of the rest of the market was hit with selling, and we've seen a slight pullback over the course of the last week or so," Shay said. "We had that rotation into energy, industrials, but I'm looking for XLP, Costco and Estee Lauder to take the next leg higher, especially going into the next earnings season."

Stocks were higher Wednesday after President Donald Trump said the U.S.-China trade dispute could be settled sooner than anticipated and the White House released official notes from Trump's call with the president of Ukraine.

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