Thursday’s sell-off leaves us with an uneasy feeling toward stocks. But that uneasiness has yet to be backed up by our indicators.
Our index indicators are giving bullish readings, unchanged from a week ago. However, things seem to be looking less positive than they have been. We have moved past the historically bullish first week of a new month, the major indexes are overbought, and the Dow still has not resolved a triple top. With these short-term disturbances present, it is important to keep an eye on support levels in the event of a pullback. For the Dow, primary bullish trend support is at 15,370, for the S&P 500, 1720, and for the Nasdaq, 3815.
Along with the major indexes, sub-index indicators remain positive. All nine S&P sector index funds are bullish. And the Dow Transports and Dow Utilities are also bullish, an important factor given that the Dow Industrial Average is sitting at a triple top. All three Dow indexes being bullish is a classic buy signal according to Dow Theory. So even though the Dow itself might be struggling, it is still bullish, and the Transports and Utilities also being bullish reinforces the idea that the Industrials eventually will be able to push through.
Our internal indicators are confirming the bullish momentum in the indexes, with one caveat. The Advance/Decline Index and Cumulative Volume Index remain bullish, but the 200-day Moving Averages Index has reversed its recent positive momentum and fallen back into bearish territory. We’ve pointed out that in the past this indicator has been very good at signaling impending market troubles. But the indexes have been bucking this indicator’s negativity all year, and until that trend changes, other indicators should be given more weight than the 200-day Moving Averages Index.
Another possible cause of a pullback is the trend in interest rates and Treasury bond prices. The iShares Barclays 20+ Yr Treasury Bond ETF (TLT) has fallen back below its 50-day moving average and again is in a primary bearish trend. Interest rates move the opposite direction of bond prices, so this implies higher rates ahead. However, a longer-term analysis of TLT and the economy itself argues that TLT is likely in a trading range between $104 and $108. Stock prices can live with that.
With our indicators continuing to trend bullish, options players should continue to play more toward bullish positions such as buying calls and writing put credit spreads. But continue to buy and hold some puts, as the indexes are due for a pullback, and pullbacks tend to happen most when the fewest people are expecting them.
With that in mind, today’s trade of the day is a bearish play on PulteGroup (PHM).
Recommendation: Buy PHM Jan 17 Put options at 90 cents or lower. After entry, take profits if the stock price falls to $15.80 or the option price reaches $1.80. Exit if the stock price closes above $18.40 or the option price falls to 60 cents.
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