by Ken Trester | September 23, 2013 5:29 am
Major stock indexes took a breather Thursday, but their bullish defiance of September’s historical trend remains intact. The Fed kept things going when it announced that it would not curtail its monetary stimulus. But will political bickering spoil the party in the weeks ahead?
Our index indicators are giving bullish readings, unchanged from last week, as all three major indexes remain in primary bullish trends relative to their key moving averages. This bullish trend will remain in force as long as the Dow stays above 15,225, the S&P 500 above 1670, and the Nasdaq above 3640. With the Fed giving a new “green light” for bullish trades by not beginning its anticipated tapering of bond purchases, those numbers can be used as stop prices by investors looking to put new money to work in stocks or mutual funds. But before doing so, keep in mind that the recent rally has caused the indexes to become extended and overbought.
Our internal indicators have also improved. The Advance/Decline Index and the Cumulative Volume Index remain bullish, and all nine S&P sector funds, including utilities, are also bullish. Utility averages returning to bullish trends is a key reversal, as it puts to rest, at least for now, of a Dow Theory sell signal taking hold due to rising interest rates. And perhaps most important, the 200-day Moving Averages Index, which had been bearish, has improved to neutral to bearish. Not much of an improvement, but an improvement nevertheless.
Speaking or rising rates, the Fed threw the markets a curveball last week by announcing that it would not begin scaling back its massive bond buying program. Several reasons were given, ranging primarily from “anemic” economic growth that would be imperiled by higher rates, to upcoming political squabbles that could also retard growth. What does it hurt to wait a few more weeks, especially with inflation not showing any signs of life?
And as one well-known commentator remarked, bond investors did the Fed’s tapering work for it. On the heels of the Fed’s threat to begin withdrawing some of its stimulus, large bond investors began selling bonds, which in turn caused interest rates to rise. Voila, liquidity was tightened a notch. By the numbers, the 20+ Year Treasury Bond Fund (TLT[1]) looks to have built a base at $102. They have a ways to go before a sustainable reversal will be in place, but as long as TLT can stay above $102, the threat of higher interest rates will be eased.
With our indicators almost unanimously bullish, options players should continue to give more weight to bullish positions. But don’t go “all in” bullish, as the indexes are overbought and the Fed is correct when it says politics can potentially wreak havoc with the economy and markets in upcoming weeks. Options traders and all investors should heed that advice.
Recommendation: Buy American Capital Mortgage Investment Corp. (MTGE[2]) December 20 Call options at $1.10 or lower. After entry, take profits if the stock price hits $21.40 or the option price reaches $2.00. Exit if the stock price closes below $19.30 or the option price falls to 80 cents.
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