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Trade of the Day: Suncor Energy (SU)

Stocks continue to march higher, but weakness in Treasury bonds could spell trouble down the road


Our index indicators continue to give bullish readings, unchanged from last week. Adding to the bullish sentiment, the slowdown in momentum that was apparent last week is showing signs of reversing, as both the S&P 500 and Nasdaq carved out new highs over the past few days. But, in a divergence worth monitoring, the Dow Industrials have not yet done that. Increased momentum or not, the market remains bullish with the Dow staying above 16,630, the S&P 500 above 1,905, and the Nasdaq above 4,225.

Our 200-day Moving Averages Index, Cumulative Volume Index and Advance/Decline Index internal indicators also remain bullish, as do nine of nine S&P 500sector funds, the Dow Transports and the Dow Utilities. And, unlike last week, when volatility indexes were drifting higher, those indexes have reversed course and are again plunging to multi-year lows.

One asset class in which momentum continues to stall is Treasury bonds (TLT). Following its powerful move higher over the first few months of the year, TLT looks to be consolidating those gains. In fact, it has fallen out of its primary bullish trend by falling below its 50-day moving average at $111.50. It could easily retake that level over the next few days, or now that it has broken below it for a second time it could continue falling. It will be interesting to see which direction TLT takes as the year progresses and the Fed continues winding down its quantitative easing program. Should TLT slip into a bearish trend, the implication would be higher interest rates, and likely massive changes in the trends of other assets.

Commodity trends are gathering momentum, but are doing so most likely in response to political tensions rather than a stronger global economy. Not surprisingly, oil and gold have been the prime beneficiaries, although oil has stalled over the past week. But momentum continues to increase in the metals, with gold and also copper bolting higher.

With momentum looking to pick up again in stocks and indices like the S&P 500, options traders should become slightly more bullish than last week. However, remain cautious, as geopolitical concerns certainly have not gone away.

With that mind, a bullish North American energy play fits the bill for this current trading landscape: Suncor Energy (SU). The Canadian oil producer has risen some 10% in the past month, and my intensive scans show that there’s more upside for the stock. The best way to play this is with an inexpensive, out-of-the money call option.

Buy the SU Sep 44 Call options at $1.00 or lower (SU closed Thursday at $42.40). After entry, take profits if the stock price hits $44.60 when the option price should be about $2.10. Exit if the stock price closes below $41.30.

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