by Ken Trester | October 29, 2013 8:27 am
Stocks continued to rally over the past week, driven forward by indications of more monetary accommodation from the Fed. But that accommodation implies that the economy still is not all that strong. The day will come when the economy matters more than the Fed. But that day is not yet here.
Our index indicators are giving bullish readings, unchanged from our last report, as all three major indexes are continuing and, in fact, building on their primary bullish trends. These bullish trends will remain in place as long as the Dow stays above 15,280, the S&P 500 above 1700, and the Nasdaq above 3770. Those numbers represent the index’s 50-day moving averages.
Our internal indicators are confirming the increased bullish momentum being shown by the indexes. All nine S&P sector funds are bullish, as are the Advance/Decline Index and Cumulative Volume Index, and the 200-day Moving Averages Index continues to trend above its 50-day moving average and climb back toward its 200-day average. And as we exit October, we will be moving into a more historically bullish time frame than what we’ve been in for the past two months.
But while stock market momentum is increasing, economic growth has been stalling, a situation that was not helped by the recent government shutdown and debt limit squabbling. The Fed will most certainly be on hold policy-wise until the ramifications of those events become more clear, which could take several months. This means that the beginning of the dreaded “tapering” of Fed Treasury bond purchases is at least that far off in the future. In fact, any move to taper before next year would likely be received very negatively by both the bond and stock markets.
This can be seen in the recent trading activity in U.S. Treasury bonds, which have continued their rebound off summer lows established during the last tapering scare. The iShares Barclays 20+ Year Treasury Bond ETF (TLT) is now comfortably above its 50-day moving average, though it has a ways to go before reaching its 200-day average. As long as TLT stays above its 50-day average, currently at $106.25, traders can assume that the threat of Fed tapering, and the highly negative effect it would have on stock prices, is not on the front burner.
With our indicators showing more bullish momentum, options players should continue to lean more toward bullish positions such as buying calls and writing put credit spreads, but continue to hold some puts in your portfolio, as the recent pickup in momentum has caused the indexes to become slightly overbought and a slight pullback is a very real possibility.
On great put opportunity for some downside insurance in your portfolio is in Cigna (CI).
Recommendation: Buy CI Dec.70 Put options at $1.35 or lower. After entry, take profits if the stock price hits $68.90 or the option price reaches $3.50. Exit if the stock price closes above $76.90 or the option price falls to 80 cents.
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