by Ken Trester | September 14, 2012 11:24 am
Our indicators continue to give bullish readings, but somewhat surprisingly, stocks have built on the gains they made over the first week of the month. We say “surprisingly” due to September’s reputation among traders as a volatile month.
But hopes for and the eventual reality on Thursday of more money-printing by the world’s central banks has smothered that volatility, at least for the time being.
The continuance of the “risk on” trade is also apparent in charts of U.S. Treasuries — iShares Barclays 20+ Yr Treasury Bond Fund (NYSE:TLT) — and U.S. dollar — PowerShares DB US Dollar Index Bullish (NYSE:UUP). TLT has seen an increase in volatility on both sides over the past few weeks and is currently sitting just above its 200-day moving average.
UUP has cruised steadily lower, and on Thursday broke below key support at $21.80. A continued move lower would signal potentially dangerous dollar weakness which in turn could kick off a trend of significantly higher commodity prices. It’s no coincidence that long-term Treasury yields have been rising along with stock prices.
So, while higher commodity prices and interest rates may someday put a dent in stock prices, that day hasn’t arrived yet. The bullish trend for stocks continues to hold, and options buyers should continue to favor calls over puts. But keep an eye on Treasury yields, the dollar and commodities because negative trends in those arenas will cause traders to pull in their horns at the expense of stocks.
But as would be expected for now, our internal indicators are confirming the moves made by the indices, as the 200-day Moving Averages Index and Advance/Decline Index have been joined by the Cumulative Volume Index in giving bullish signals.
Sector indices also remain bullish, with eight of nine sectors in bullish trends relative to their key moving averages. No reason to fight the tape, especially when my analytics are flashing so many bullish opportunities for my Maximum Options traders.
The financials in particular are sending some buy signals. While the fundamental do support that because the Fed’s move to extend zero interest rates through mid-2015 means those lower rates help banks with the their net interest income, basically their profit market. It explains why banks have been on such a tear lately.
Taken with the European Central Bank action, which removed some of the risk of the eurozone financial crisis, the Fed’s decision is leading people to believe that while banks might not be entirely solid for the long haul, their short-term prospects are ripe for a quick run-up.
My proprietary scans don’t take the political or economic developments into consideration, yet and still, some prominent financials are standing out in my results.
Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) are all rated as “powerhouses” in my system for the short to intermediate term (if you do pull the trigger, I wouldn’t suggest owning these for any longer than two to six weeks). Of the three, my analysis rates BofA highest for options trading.
I love cheap options, and it doesn’t get much better than this opportunity. Buy the BAC Nov 10 Calls at 32 cents or less. In real-dollar terms, that’s only $32 a contract, excluding commissions.
After entry, take profits if the stock price hits $10.30, at which point the option should be trading at or around 70 cents. Exit the call option if the stock price closes below $9, or the option drops to 20 cents.
And a side note, if you took my recent advice to buy the KB Home (NYSE:KBH) Jan 12.50 Calls, you would have been able to take your 65% profit in a week’s time. That’s the power of options!
Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973.
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