Our index indicators continue to give bullish readings, unchanged from last time. This is not a surprise, as we are in one of the most bullish time periods of the year. Also, we are entering the first week of a new month, which also has a bullish historical bias. Nevertheless, the indexes remain very overbought, so a pullback within the next couple of weeks cannot be ruled out.
Moving average support levels continue to climb for the indexes and now sit at 17,250 for the Dow Industrials, 2,005 for the S&P 500, and 4,575 for the Nasdaq.
As before, our internal indicators also remain bullish. The 200-day Moving Averages Index remains level 3 bullish, and the Advance/Decline Index and Cumulative Volume Index remain level 1 bullish. Eight of the nine major S&P sector funds are in primary bullish trends, with the lagging industry continuing to be energy. And volatility indexes are again moving lower.
Following a nice “rolling bounce,” Treasury bonds (TLT) have regained their upward momentum. TLT remains bullish above $119. An interesting idea was put forth recently by a well-known economist that the Fed’s policy of increasing the money supply to head off deflation might be having an opposite effect. That’s because companies have been using low interest rates to borrow money to increase output and productivity. More supply means lower prices.
Companies have also been borrowing to buy back stock, which is reflected in the bullishness of the indexes. It is safe to assume that as long as Fed policies remain what they currently are, nothing in the economy or markets is going to change.
The dollar (UUP) continues its consolidation phase but is a long way from a trend change. That change won’t happen until UUP falls below $22.95. A strong dollar generally means weak commodity prices, and that remains the case, although copper (CU) and gold (GLD) are trying to launch recovery rallies. CU is important to watch given copper’s reputation as a leading economic indicator.
But oil (USO) argues against a strengthening global economy by continuing its fall toward multi-year lows. Of course, thanks to record North American production volume, USO is also a prime example of how increased supply leads to lower prices.
With momentum in the major stock indexes continuing on the bullish side, options traders should continue to buy calls. But, as usual, don’t neglect bearish positions, as the current overbought state of the major stock indexes could lead to a sudden and sharp pullback in the next couple of weeks. Today’s recommendation is for one such put trade.
Buy the CBS Corporation (CBS) Jan 52.50 Puts (CBS150117P00052500) at $1.45 or lower. Note that this is the monthly option expiring on Jan. 17, 2015. After entry, take profits if the stock price hits $50.30 or the option price hits $3.40. Exit if CBS stock closes above $56.20.
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