The stock market has lost some momentum over the past week, but the overall trend remains bullish.
Our index indicators are giving bullish readings, unchanged from last week. However, recent price action reveals a stock market in which indexes are showing signs of fatigue and slowing momentum. This brings into view the possibility of a pullback or more serious correction, and support levels have become key. Current support is at the index’s 50-day moving averages, which for the Dow Industrials is at 16,760, for the S&P 500, 1,933, and for the Nasdaq, 4,305. The indexes remain well above these levels, so the current slowdown may prove to be nothing more than that: a temporary slowdown.
Our internal indicators support the possibility that a pullback may be in store, as the 200-day Moving Averages Index has dipped below its 50-day moving average. However, the Cumulative Volume Index and Advance/Decline Index remain bullish. Eight of nine S&P sector funds are bullish, unchanged from a week ago, although the non-bullish fund has changed to the economically-sensitive Industrials Fund from the interest-rate-sensitive Utilities Fund. And as you would expect in a market showing increased uncertainty, volatility indexes have bounced off of recent record lows and are moving higher.
Also rebounding from recent weakness have been Treasury bonds (TLT), which were showing signs of breaking down a week ago amid rumors of the Fed ending its current interest rate policy sooner than anticipated. But that fear has been put on the back burner, as TLT has rebounded and moved back into a primary bullish trend. Geopolitical events are also benefiting Treasuries. TLT stays bullish by remaining above $111.90.
Commodities are also benefiting from the new anxiety. Copper remains in a primary bullish trend, though a pullback from its recent sharp move higher should be expected. Gold is continuing its recovery and looks like it is building toward a renewed bullish trend. Oil remains in pullback mode but can hardly be described as bearish. Overall, commodities are giving investors a place to put their money other than stocks, and some are taking advantage of that.
With stock market momentum decreasing and money again moving back into Treasuries, “risk-off” is back in play, which is a reversal from a week ago. Options traders should follow suit by pulling back on bullish positions and adding some bearish puts to portfolios. But don’t go overboard in either direction because, as has been the case for quite a while now, sentiment could very easily reverse again. However, at the moment there’s money to be made with the following bearish trade.
Buy the Du Pont (DD) Oct 62.50 Puts at $1.10 or lower (DD closed Thursday at $64.94). After entry, take profits if the stock price hits $63.20 or the option price hits $2.00. Exit if the stock price closes above $67.10.
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