Our index indicators are giving bullish to neutral readings, a downgrade from last week’s bullish readings. As has been the case for most of this month, momentum continues to swing sharply from bullish to bearish, and the past week has seen the bearish side hold the upper hand. But even with the volatility increase, the major indexes only today fell below their 50-day moving averages. Just a single strong day or two to the upside could reverse the trends and momentum yet again. For the Dow Industrials, the 50-day average is currently at 16,980, for the S and P 500, 1980, and the Nasdaq, 4500.
But until those averages are overtaken, the short-term momentum for stocks must be considered bearish. And that is confirmed by our internal indicators. The 200-day Moving Averages Index remains strongly bearish. As we’ve mentioned in the past, this indicator has a solid track record of foreshadowing steep downturns. The Advance/Decline Index and Cumulative Volume Index have fallen into neutral territory, and as with the indexes, should be looked at as short-term bearish until they reverse their current course. Only one of the nine major S and P 500 sector funds is bullish, down from seven of nine last week, and volatility indexes are moving higher.
When stock volatility increases, Treasury bonds (TLT) generally do well, and that is the case now. TLT has strengthened over the past few days and has moved back above its 50-day moving average, returning it to a primary bullish trend relative to its key moving averages. It remains in that trend by staying above $115.
And as would also be expected with heightened stock volatility, junk bonds (JNK) also are not faring well. JNK remains in a primary bearish trend and has broken below key short-term support. Frankly, a longer-term discrepancy between TLT and JNK would be a welcome development, as it would be a step toward returning current interest rate differentials back toward more normal spreads.
The U.S. dollar (UUP) continues to strengthen, in turn continuing the weakness in commodities. Copper (CU), gold (GLD) and oil (USO) all remain bearish. Not only are commodities being pummeled by a strong dollar, but outlooks for continuing low inflation and possible deflation in several parts of the globe are adding to the sector’s woes. A bright side to commodity weakness is in developed and growing economies such as the U.S., lower commodity prices keep a lid on inflation and interest rates.
With stock indexes, like the S and P 500, and indicators falling into short-term bearish positions, options traders should lean toward buying put options while reducing call holdings. But don’t go overboard and sell your entire portfolio. Indicators have been in this position several times this year, only to see stocks reverse their bearish course. The longer-term trend for stocks remains bullish to neutral, but increasing caution should still be your watchword.
I have a put option on global giant and S and P 500 component Eaton Corp. (ETN), as the technical analysis shows the stock is gearing up for a pullback in the short term. To profit from it, I recommend the following:
Buy the ETN Nov 60 Put options at 90 cents or lower (ETN’s price at Thursday’s close was $64.50). After entry, take profits if the stock price hits $59.90 or the option price hits $2.50. Exit if ETN shares close above $66.80.
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