With next week being the first week of a new month, signs point to the indices continuing to move higher, including our index indicators, which are giving bullish readings, unchanged from last week, as the Dow Industrials and S&P 500 continue to build on all-time highs. Consistent with the indices moving higher, so are their 50-day moving averages, which are the first lines of defense in the ongoing bull market. For the Dow, its 50-day is at 15,630, for the S&P 500, 1,750, and for the Nasdaq, 3,880. Until the indices fall below their 50-day moving averages, the bull market remains intact.
Our internal indicators continue to support the bullish momentum shown by the indices. The Advance/Decline Index and Cumulative Volume Index remain bullish, while the 200-day Moving Averages Index is now bearish to neutral. Also, eight of nine S&P sector index funds are bullish.
However, the one non-bullish S&P sector fund might be some cause for concern, as it is the Utilities sector. That coincides with the Dow Utility Average also falling out of bullish territory. Classic Dow Theory holds that a bull market is in force as long as all three major Dow Averages — Industrials, Transports and Utilities — are rising in tandem. That one of those averages, and not coincidentally the average most correlated to interest rates, is rolling over could prove to be a caution sign worth heeding.
Speaking of interest rates, as measured by long-term Treasury bonds (TLT), they appear to be on the rise again. TLT has fallen back into a primary bearish trend relative to its key moving averages (interest rates move in the opposite direction of bond prices), and has now compounded that weakness by carving out a bearish short-term chart pattern of lower highs and lower lows. Thus far key support at $102 continues to hold, but that support is likely to be challenged in the future as rumors of the Fed tapering its bond buying program continue to hit the markets.
But until those rumors become reality (as we’ve mentioned, we think that reality is farther out in the future than many believe), the best course of action is to play along with the Fed. That means continue to focus on weighting options positions toward the bullish side.
One area of the market that’s getting a lot of attention is airline stocks with the news of a federal ruling that approved the merger of American Airlines and US Airways, which would create the largest airline. I made a recent recommendation in Southwest Airlines (LUV) that’s taking off, and my system has uncovered another bullish play in the space:
Buy the Delta Airlines (DAL) Jan 30 Calls at 98 cents or lower. After entry, take profits if the stock price hits $31.40 or the option price hits $2.10. Exit if the stock price closes below $28.20 or the option price closes below 50 cents.
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