Our index indicators are giving bullish readings, unchanged from a week ago, and a refreshing change from the week-to-week signal changes we‘ve been seeing most of this year. As we mentioned last week, through all the recent volatility, the underlying bullish trend remained intact, and the past week confirmed that.
That trend will remain in place as long as the indices stay above their 200-day moving averages. For the Dow Industrials, that average is currently at 17,125, for the S&P 500, 1975, and for the Nasdaq, 4500. The index’s 50-day moving averages are of course at higher levels, but the past few weeks have shown that violation of those averages has not resulted in prolonged selling.
Our internal indicators are confirming the bullish action of the indices. The 200-day Moving Averages Index remains 3 bullish, and the Cumulative Volume Index and Advance/Decline Index are level 1 bullish. For reference, level 1 is the strongest reading, level 3 the weakest. Seven of the nine major S&P sector funds are level 1 bullish, down from eight of nine last week, but the declining index is Utilities (XLU), which might be expected as money moves out of safe havens and into riskier sectors.
In conjunction with money leaving safe havens, Treasury bonds (TLT) continue to pull back, and in fact TLT has pulled back to its 50-day moving average. It has yet to fall through that average, but after the strong run TLT has had over the past year it would not be a surprise to see the pullback continue.
On the other hand, global strife can easily send money back into TLT. The dollar (UUP) has also seen its bullish trend temporarily stall, but not to the extent of TLT. Junk bonds (JNK) continue to rally but might be approaching an overbought technical condition.
More evidence of the fear factor abating in the markets is found in gold (GLD), which has fallen back into a primary bearish trend. Meanwhile, oil (USO) continues to show signs of making a bottom. One idea recently advanced is that the Federal Reserve’s quantitative easing (QE) artificially propped up the price of oil for years by creating money that was subsequently invested in oil. When the Fed ended QE, oil prices collapsed. Other factors certainly contributed to oil’s price decline, but that is something to think about now that Europe has embarked on its own QE program.
With major U.S. stock indices regaining bullish readings and volatility receding, options traders should continue to move toward bullish positions. But the geopolitical world remains unstable, so also hold some bearish positions, and continue to take smaller positions than normal. Volatility may be easing, but it always best to err on the side of caution.
Against the backdrop of the Nasdaq’s strength this week, I’m recommending a bullish semiconductor stock: QLogic (QLGC).
Buy the QLGC Apr 15 Calls (QLGC150417C00015000) at $0.30 or lower. After entry, take profits if the stock price hits $15.00 or the option price hits $0.70. Exit if the stock price closes below $13.50.
For such a cheap option, we could easily grab a triple-digit winner if QLGC and the broader tech space continue exhibiting power.
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Note: U.S. markets are closed Monday, Feb. 16, to observe Presidents Day, so we’ll bring you the next Trade of the Day on Tuesday, Feb. 17.
