Stocks seemed to take a rest over the past few days, but the overall trend remains higher. Our index indicators are giving bullish readings, unchanged from last week, even with the small pullback over the past few days. Bearish sentiment might point to a small “double top” made by the Dow Industrials as a portent for future trouble, but until the indexes break below their 50-day moving averages, the bullish trend remains intact. Those averages are at 16,680 for the Dow, 1,915 for the S&P 500, and 4,255 for the Nasdaq. More important than the actual numbers, the moving averages continue to trend higher.
Our internal indicators support continued bullishness in the indexes, as the 200-day Moving Averages Index, Cumulative Volume Index and Advance/Decline Index remain bullish. Nine of nine S&P sector funds and the Dow Transports and Dow Utilities are also bullish. Volatility indexes moved higher off of multi-year lows over the past week, but their overall trend remains lower.
Treasury bonds (TLT) recovered some of the momentum they lost over the past few weeks, as TLT moved higher off of its 50-day moving average, which now sits at $111.60. Continued so-so economic numbers are behind the strength in Treasuries, as well as an apparent lack of concern over potential inflation from the Fed. Perhaps that’s due to the type of inflation in the pipeline. As we mentioned a few weeks ago, inflation caused by rising raw goods prices such as oil and food (cost-push inflation) are potentially recessionary; thus the renewed rally by TLT.
Only when wages rise to offset the input cost increases will real inflation show up at the consumer level (demand-pull inflation). Oftentimes, economic growth is accompanied by some demand-pull inflation. But the action in commodity indexes over the past week argues that that isn’t about to happen, as copper and oil declined and gold temporarily stalled. Money coming out of those assets quite probably moved into Treasuries.
With stock momentum stalling somewhat and money moving back into Treasuries, the “risk-off” trade looks to be back in play, and options traders should follow suit by taking smaller bullish positions while adding some bearish defensive positions as well.
Today’s recommendation is for one such bearish trade, in Express Scripts (ESRX). While the rest of the Nasdaq is up 8% from its April lows, ESRX is down 4.3% in the same timeframe, and on June 17 came news that Express Scripts’ CEO sold 681,508 shares, or nearly half of his ESRX holdings. Our systems have identified this as a good time to profit using put options.
Buy the ESRX Aug 65 Puts at $1.05 or lower (ESRX closed Thursday at $68.84). After entry, take profits if the stock price hits $65, when the option price should be about $2.40. Exit if the stock price closes above $70.30.
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