The stock market suffered though a tough day on Thursday, and our internal indicators are weakening. Is it time to “sell in May and go away?”
Our index indicators continue to give bullish to neutral readings, unchanged from last week. The Dow Industrials and S&P 500 remain above their 50-day moving averages, but the Nasdaq continues to trend below its 50-day average. Since falling below its 50-day average, the Nasdaq made a fourth attempt over the past week to move back above it, but the effort failed yet again. It must move above 4,130 to make that happen. Meanwhile, the Dow must stay above 16,400, and the S&P 500 above 1,865, in order to maintain their primary bullish trends.
Our internal indicators, while leaning to the bullish side, are weakening. The 200-day Moving Averages Index continues to trend below its 50-day moving average, and the Cumulative Volume Index has joined it. Only the Advance/Decline Index among our internal indicators is bullish. Seven of nine S&P sector funds are bullish, unchanged from a week ago, while the Dow Transports and Dow Utilities are also bullish.
As they have been for all of this year, long-term Treasury bonds (TLT) remain one of the strongest asset classes, and in fact have gathered momentum over the past few days. TLT will maintain its primary bullish trend by staying above its 50-day moving average at $110. Strength in Treasuries is a sign that traders believe neither a strong economy nor inflation are on the immediate horizon. In fact, with each new 52-week high TLT moves to, the more likely it is that recession and possibly deflation might be in the cards.
Key commodities showed some strength over the past week as well. Oil remains in a primary bullish trend, copper jumped above its 50-day moving average and gold continues to build a support base in the $124 area. So why aren’t these trends signs of inflation? The answer is, they are. But commodity inflation is mostly “cost push” inflation, which serves to limit consumers’ purchasing power by increasing the cost of essentials like food and energy. Only if incomes and wages increase enough to offset commodity-cost increases will real inflation truly take hold. But that is what the Treasury market is saying is not going to happen.
With Treasury bonds and commodities arguing that accelerating economic growth is not in the near future, and stock-market indicators weakening, options traders should continue to carry a neutral weighting between bullish and bearish positions. Last week’s trade was a put option; for those looking to balance that with a call option, it helps to select a company that stands to benefit from those rising food costs.
Pilgrim’s Pride (PPC) is a chicken producer that sells fresh, frozen and value-added chicken (such as nuggets and patties) in the United States, Puerto Rico and Mexico. PPC shares are up more than 51% for the year-to-date despite the weakness in the larger Nasdaq, and the latest earnings report included both higher sales volume and an 82% increase in gross profits. The stock came in a bit this week to the $24.50 level amid the wholesale market decline; here’s a trade that will allow you to buy the dip while it lasts.
Buy the PPC Sep 30 Call options at $0.60 or lower. After entry, take profits if the stock price hits $27.10 or the option price hits $1.30. Exit if the stock price closes below $23.40 or the option price closes below $0.40.
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