by Ken Trester | October 11, 2013 9:06 am
Stocks finally received some good news regarding the mess in Washington on Thursday. But will the good news continue, and can stocks build on the Thursday rally?
Our index indicators are giving bullish to neutral readings, unchanged from last week. While rumors of a potential short-term fix to the budget stalemate in Washington helped the indexes rally on Thursday, it remains to be seen whether that rally can be sustained. Also on Thursday, a weekly jobs report came in much worse than expected. This would seem to argue for the Fed to continue its full-throttle monetary easing, a bullish indicator for stocks, but weak jobs numbers are also a reminder that the economy remains a long way from being robust.
By the numbers, on Thursday the Dow bounced off of key support at 14,750 but remains below its 50-day moving average, giving it a neutral reading. But the S&P 500 and Nasdaq, which have been relatively stronger than the Dow recently, have both crossed back above their 50-day averages and are in primary bullish trends. The S&P 500 will remain in that trend by staying above 1,675, and the Nasdaq will do the same by staying above 3,690.
Our internal indicators are reflecting the uncertainty of Thursday’s rebound rally. The 200-day Moving Averages Index remains bearish, and the Advance/Decline Index and Cumulative Volume Index are barely bullish. Eight of the nine S&P sector funds are bullish, but a couple of those funds needed a late surge Thursday to reach that threshold.
Also experiencing a reversal on Thursday were U.S. Treasury Bonds (TLT). Following a few weeks of strength, on Thursday TLT darted lower early in the day before clawing back later on, but it was not able to get back above its 50-day moving average. It could be that Thursday’s early weakness was due to the strength in stocks, as traders sold Treasuries to buy equities. But the underlying trait of TLT is that it moves in the opposite direction of interest rates, so TLT resuming a bearish trend implies higher rates ahead, which is not a good sign for an economy that is still struggling.
With our indicators continuing to give neutral readings, options players should divide your resources evenly between bullish and bearish positions. And our ongoing suggestion to pull back your exposure significantly in all markets until things in Washington are permanently resolved still holds.
Given that our last Trade of the Day recommendation was for a bearish put in the SPDR Gold Trust ETF (GLD) that is working nicely, we’ll focus on a call trade today.
Buy the Medtronic (MDT) Jan (2014) 57.50 Calls at 79 cents or lower. After entry, take profits if the stock price hits $56.50 or the option price hits $1.50. Exit if the stock price closes below $53.20 or the option price closes below 50 cents.
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