The stock market closed the holiday-shortened week with mixed readings, but the underlying trend is much more positive than it was just a week ago.
Our index indicators are giving bullish to neutral readings, unchanged from last week, as the Dow Industrials and S&P 500 have retaken their 50-day moving averages. However, the Nasdaq remains below its 50-day average, and must rally back above 4,170 to rejoin the Dow and S&P in primary bullish trends. The Dow must stay above 16,260, and the S&P above 1,850, to maintain those trends.
Our internal indicators continue to paint a bullish picture. Recall that last week these indicators remained bullish while the indexes struggled, but, since then, the indicators have proven correct in predicting that the volatility of the indexes would be short-lived. The 200-day Moving Averages Index, Advance/Decline Index and Cumulative Volume Index remain bullish, though the 200-day Moving Averages Index did bounce off its own 50-day moving average. Also, six of nine S&P sector funds are now bullish, up from last week’s three of nine. The Dow Transports and Dow Utilities are also bullish.
Reflecting the turnaround in psychology from a week ago, long-term Treasury bond prices (TLT) have struggled over the past few days. But TLT remains very bullish. Even with its recent pullback, it remains in new high ground dating back to last July. And for the first time in nearly a year, its 50-day moving average has crossed back above its 200-day average. This is a very bullish trend change and implies that low interest rates are going to be here for quite a while longer. On the downside, it also implies that the economy is not in danger of growing fast enough to overheat into inflation.
Also confirming the recent move back toward stock market equities, commodity trends have weakened a bit. Oil remains the star of the group, edging higher over the past week and strengthening its bullish trend. Staying above $36.25 will maintain that trend.
On the other hand, copper and gold have taken steps backward. Copper has fallen back below its 200-day moving average to a neutral reading, and gold has fallen back into a primary bearish trend. Copper and gold are generally looked at as indicators of growth and inflation. Combined with the primary bullish trend in long-term bonds, these three key indicators are all saying faster economic growth is not on the way.
With our stock market index indicators in a bullish to neutral position, options traders should return to a neutral weighting between bullish and bearish positions. Bullish in the event that the indexes regain their upward momentum, and bearish in the event that bonds and commodities prove to be right, and slower growth translates into equity weakness.
As such, I have a new bearish stock market position for you in medical device manufacturer Becton, Dickinson and Co. (BDX).
Buy the BDX June 105 Puts options at $1.00 or lower. After entry, take profits if the stock price hits $107.30 or the option price hits $2.70. Exit if the stock price closes above $116.10 or the option price closes below 60 cents.
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