Major stock indexes remain bullish, but momentum is slowing ahead of some key political deadlines.
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. The Dow, with three new additions to its 30 stocks, traded down to its 50-day moving average but bounced of it, as if on cue. Meanwhile, the S&P 500 and Nasdaq remained comfortably above their 50-day averages. The Dow’s action is more evidence that the bullish trend will remain in place as long as the indexes remain above those averages, which for the Dow is at 15,250, for the S&P 500, 1675, and for the Nasdaq, 3660.
Unfortunately, our internal indicators have weakened slightly. Most prominently, the 200-day Moving Averages Index has fallen back into a bearish trend after showing some slight improvement last week. The Advance/Decline Index and the Cumulative Volume Index remain bullish, but seven of nine S&P sector funds are now bullish, down from last week’s nine of nine. So beneath the surface, momentum is slowing — not surprising as we head into some weeks of political debate over budgets and spending.
Treasury bonds are also feeling the pull of politics. As would be expected, the iShares Barclays 20+ Yr Treasury Bond ETF (TLT) has been rallying as traders seek out a safe haven in which to hide. Last week we mentioned that TLT looks to have built a base at $102, and it has since rallied off of that and has now crossed above its 50-day moving average at $106. While following Thursday’s pullback, that crossover might prove to be tenuous at best, but for the time being TLT’s trend can be considered to have improved. Continued improvement would have a beneficial effect on interest rates and stock prices.
Another benefit would of course be a timely resolution to the political budget shenanigans. And while some are doing their best to keep it from happening, in the end any new budget will include funding for the new health care law. We are not experts in the field, but we do believe that the new act will have some serious side effects on the economy. One effect will very possibly be harmful to employment, which in the long run would not be good for stocks. But another effect might be companies being allowed to shift their health care responsibilities for their employees to the government. This significant cost reduction would of course be beneficial for profits and stock prices. Just a thought to keep an eye on.
That said, with our indicators, while weakening slightly, still bullish, options players should continue to give more weight to bullish positions. But don’t go “all in” bullish, as upcoming political events might wreak havoc with the economy and markets. In fact, we suggest pulling back your exposure significantly in all markets until things in Washington are resolved.
If you do want to dip a toe into the options markets, here is one bullish opportunity my scans have unveiled.
Recommendation: Buy TJX Companies (TJX) Nov 57.50 Calls (TJX131116C00057500) at $1.05 or lower. After entry, take profits if the stock price hits $58.70 or the option price reaches $2.20. Exit if the stock price closes below $55.30 or the option price falls to 70 cents.
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