Trade of the Day: Tenet Healthcare (THC)

by Ken Trester | September 13, 2013 4:37 am

Stocks defied their historical September bearishness by posting three consecutive triple-digit Dow gains to start the past week before leveling off on Thursday. Some favorable political news contributed to that performance. But more potential political shenanigans lie ahead, so the jury is still out for the rest of this month.

That said, our index indicators are giving bullish readings, an upgrade from last week’s bullish to neutral, as all three major indexes have returned to primary bullish trends relative to their key moving averages. This bullish trend will remain in force as long as the Dow stays above 15,150, the S&P 500 above 1,660, and the Nasdaq, which never did fall below its 50-day moving average during the overall market’s recent bout of weakness, above 3,610.

Our internal indicators have improved to neutral to bullish readings, from last week’s neutral to bearish. The Advance/Decline Index and the Cumulative Volume Index are both bullish, and seven of the nine S&P sector funds are also bullish. But some key indicators are to flashing caution signs. The 200-day Moving Averages Index remains bearish, and utilities indexes are also bearish. This includes the Dow Jones Utility Average, which slipped into a primary bearish trend on Thursday. Followers of Dow Theory will interpret this as a potential crack in that theory’s bullish case.

As we’ve documented for months, stocks continue to trade around the Fed and what it plans to do with its ongoing program of massive liquidity creation. Recent economic reports have some traders questioning whether the rumored “tapering” of Fed bond buying will or even should begin as soon as the market thinks it will, which is in the next few weeks. But others believe that because the possibility of tapering was put out there, it will happen at least for a short while, just so the Fed can be seen as “keeping its word.” Then, if the economy sputters, the tapering can be pulled back.

The expectations surrounding tapering can be seen in the price of long-term U.S. Treasuries (TLT), which would be most directly affected by the Fed reducing its bond purchases. TLT has been in a vicious downtrend since May in anticipation of possible Fed action, but looks to have at least temporarily formed a base in the $102 area. If that base holds, it would signal that the market has priced in the full effect of a Fed move, and that would be a positive for stocks.

With our indicators improving, options players should look to give slightly more weight to bullish positions than bearish ones, even though that stance bucks the conventional thinking regarding stock performance in September. But potential Fed action is only one roadblock on the horizon. Upcoming political budget battles could cause significantly more problems, so holding bearish positions also makes sense. Here’s one to get you started in a healthcare name that recently announced a private offering of unsecured and senior notes, which didn’t endear the stock to analysts or creditors.  A put is great way to gain from a near-term slump in the stock.

Buy the Tenet Healthcare (THC[1]) Nov 35 Puts at $1.20 or lower. After entry, take profits if the stock price hits $34.40 or the option price hits $2.70. Exit if the stock price closes above $40.10 or the option price closes below 80 cents.

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Endnotes:
  1. THC: http://studio-5.financialcontent.com/investplace/quote?Symbol=THC
  2. Ken Trester: http://investorplace.com/2011/06/author/Ken-Trester/
  3. Power Options Weekly: https://order.investorplace.com/index.jsp?sid=WRC177%26uid=208.250.100.2-1292420591507798
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