Stocks have turned in a good week thus far, but that was to be expected following a holiday. The upcoming week will be more telling as to how the rest of the month might go.
Our index indicators are giving bullish to neutral readings, unchanged from last week. The Dow and S&P 500 continue to trade below their 50-day moving averages, although the S&P 500 just barely, while the Nasdaq continues to trade above it. For the overall bull market to remain in force, the Dow and S&P 500 need to stay above their 200-day moving averages, currently at 14,580 for the Dow and 1580 for the S&P 500. The Nasdaq will remain in a primary bull market by staying above its 50-day moving average at 3585.
Aside from short-term trouble spots that could roil the markets, the longer term concern continues to be Treasury bond prices and interest rates. The 20+ Yr Treasury Bond ETF (TLT) again suffered a bad week, falling back down close to support at $102. As we’ve documented, no real support exists between TLT’s current price and $93, so a fall to that level would not be a shocking development, although the economy might beg to differ (interest rates move in the opposite direction of TLT’s price).
In the meantime, shorter-term trouble spots are lurking, ranging from potential monetary policy shifts, to political and budget stalemates, to geopolitical troubles. Also, now that have almost passed through the first week of a new month, which has lived up to its reputation as being a traditionally bullish calendar period, September historically has not been a good month for stocks. Of course, everyone is aware of this reputation, so from a contrarian viewpoint it would not be a surprise to see the indexes continue to rally, especially in light of their current oversold conditions.
With our indicators giving mixed signals, options players might think about giving equal weight to bullish and bearish positions. But with the potential short-term hazards still in front of us, it would be a good idea to be cautious with your call buying, and step up your put buying.
One call option that passes muster in this environment is in Micron Technology (MU).
Recommendation: Buy MU January 17 call options at $1.15 or lower. After entry, take profits if the stock price hits $17.00 or the option price reaches $2.00. Exit if the stock price closes below $14.30 or the option price falls to 80 cents.
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