by Jon Markman | March 10, 2014 9:56 am
It wasn’t pretty, but stocks rose broadly last week following the single-session panic last Monday over Russia’s incursion in the Crimea. The Dow Jones Industrials mustered a 0.8% gain for the five-day span, while the S&P 500 rose 1%, the Nasdaq rose 0.6% and the Russell 2000 was king of the hill with a 1.7% gain. A couple of key sectors did much better than that, with iShares Transportation up 3.5% and iShares Aerospace/Defense up 1.9%.
Another week, another advance. It may not sound like much, an 0.8% gain in the Dow Jones. But if you multiply that by 52, you finish December with a 41.6% annual gain uncompounded. Bam.
Despite the strength, everyone keeps wondering if the bull market is intact, or if it’s about to be derailed by conflict in the Crimea, or anemic U.S. economic growth, or a slowdown in China, or the Fed tapering, or the Affordable Care Act, or emerging markets currency stress, or higher inflation.
Yet the reality is that the bull market turns five years old day — Happy Birthday, Mr. Bull! — with most of its faculties intact. No major signs of dementia in sight. To be sure, stocks are a bit overbought at the moment, probably a little overvalued too, but not in the sort of way that ends a bull cycle.
One thing that we learned most emphatically in 2007 was that very often the cracks appear first in the high-yield credit markets, and then investment-grade credit, and then in sovereign credit. And, to be sure, nothing nefarious or super-worrisome is happening in those spheres now. Individual bonds may be overvalued, no doubt, but there are no red flags. At any time there could be another 5% to 10% correction — but unless the credit market cracks or the global economy really tips over, in broad strokes the long side will continue to be the right side.
So, looking at those areas of the market that are doing particularly well: As I mentioned before, transports are winging higher, led by airlines and railroads. Financials also put in a great week, led by Wells Fargo (WFC), Berkshire Hathaway (BRK.B) and regional banks like Regions Financial (RF) and Fifth Third Bancorp (FITB). Improvements in their loan and bond holdings were cited.
The trade I have for you today is one with strong exposure to these very industries. General Electric (GE) is a Dow Jones component and a conglomerate with major units in the transportation, industrial, energy and financial industries. Shares pulled way back in late January due to the company’s heavy exposure overseas in emerging markets and the eurozone, but they have been rebounding in recent days in a manner similar to bounces that took them all the way back to prior highs. The calls happen to be very cheap right now.
I recommend that you buy the GE Apr. $25 calls (GE140419C00025000) at $1.35 limit, good till canceled. To make sure that you don’t miss out on my expected rally, if you’re not filled by 10:30 a.m. ET, but the calls are still under $1.65, then buy at market between the bid and the ask price. If filled, set an initial target at $2.30; set up to sell half there, as I expect that there will be further profits to come.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
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