Our index indicators are giving bullish readings, unchanged from a week ago. But following a burst to open this month, index momentum has stalled and stocks are suffering. In fact, the Dow Industrials may be forming a double top. While this could be an early warning sign of something negative, the Dow’s situation thus far has not been mirrored by the S&P 500 nor the Nasdaq, both of which remain in primary bullish trends. As does the Dow itself, and it will remain in that trend by staying above 16,910. The S&P 500 remains bullish by staying above 1,970, and the Nasdaq above 4,475.
Our internal indicators are also flashing a potential warning signal for stocks, as the 200-day Moving Averages Index has fallen into a bearish-to-neutral position. More ominous, the shorter-term 40-day Moving Averages Index is outright bearish. The Advance/Decline Index and Cumulative Volume Index remain bullish, but both have also weakened. Eight of the nine major S&P sector funds remain bullish, the same number as last week. And volatility indexes continue to creep higher.
U.S. Treasuries (TLT) are continuing their pullback, a sign that traders are more concerned with possible future Fed actions than global political conflicts. In fact, TLT has fallen below its 50-day moving average into a bullish-to-neutral trend. But it will remain overall bullish by staying above its 200-day moving average at $112. As long as TLT is bullish, the outlook for interest rates will remain favorable for stocks. Junk bonds are continuing their skittishness and have been in a steady decline that is showing no sign of slowing.
The U.S. dollar remains in a strong uptrend, and along with that comes weakness in commodities. Poor economic outlooks are also contributing to commodity weakness. Copper has now fallen below both its 50-day and 200-day averages. Copper is looked at by many as a key gauge of global economic growth. With the lack of such in Europe, it’s not surprising copper is in decline. Oil is confirming that decline, as slower growth means less energy demand. Gold also remains bearish, a sign that deflation fears are growing.
With momentum in stocks and indexes stalling, and commodities signaling slower economic growth on the horizon, options traders should weight evenly between bullish and bearish positions. As we mentioned last week, increasing caution should be your watchword.
So, I’ve got another put option for you that my system has determined is undervalued. The underlying stock, insurer Aflac (AFL) is showing signs of technical weakness that should lead to a short-term pullback from which you can profit.
Buy the AFL Nov 57.50 Puts (AFL141122P00057500) at $1.00 or lower. After entry, take profits if the AFL shares hit $57.40 or the option price hits $2.00. Exit if the stock price closes above $61.00.
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