Thursday was a key day for the markets, as the S&P 500 traded down to the bottom of its persistent range before eventually breaking through it to the downside. The close below that range suggests a negative bias to what’s likely to come next.
Additionally, there has been a lot of negative sentiment in the market. I’m reminded again of the saying that when they raid the house, they take all the girls — and the piano player. That seems to be occurring now, with international markets falling apart.
Things are not so great here in the United States either. More than 100 of the stocks in the S&P 500 are officially in a bear market, and that number is increasing. The big factors continue to be the slowdown in China and tumbling oil prices, and we’re at the point that 85% of energy stocks are now in bearish territory, which is not a good sign.
While most commodities remain in bear markets, gold does appear to be in a rebound stage, but I don’t expect that to last long. It’s trading around the $110 level on the SPDR Gold ETF (GLD), which is where it’s recently found a lot of overhead resistance. But, on the other side of the coin, hedge fund manager Stanley Druckenmiller has gone long GLD, so that’s something to consider. I also expect that silver will run into similar resistance and resume its downtrend.
With my indicators decidedly bearish, a downgrade from last week, and the trading range finally broken, I continue to lean toward the bearish camp. The S&P 500 Volatility Index (VIX) is on the move up, trading around 19, which tell us that professional traders are buying more insurance in the form of put options.
My original expectation was that we might see a downside break in the September/October timeframe, but the way the market closed on Thursday suggests that it may be sooner.
The only positive to a down market is that trading the bearish side using put options can yield significant – and quick – gains. The Time Warner (TWX) puts I recommended last week shot up as TWX slid more than 5% on Thursday. The stock has now hit my $73.30 target, so take your 100% or so profits in the puts now if you haven’t already.
With the market darkening and lots of fast downside money to be made, it should be no surprise that I have a bearish put recommendation for you today.
Oil and gas E&P company Murphy Oil Corp. (MUR) has a chart that looks a little dirty. The stock has slid severely since the beginning of the year, and its momentum continues to wane. It has no material support anywhere close to its current trading levels around $30, so it could be setting up for a free-fall back.
Buy the MUR Oct. 16th $27.50 Put options at 90 cents or lower.
After entry, take profits if the stock price hits $26.80 or the option price hits $2.20. Exit if MUR closes above $31.70.
As an added trading idea for you, consider buying puts on the ProShares UltraPro S&P 500 ETF (UPRO).
A put play in UPRO is bet that the S&P 500 will decline (UPRO is a triple-leveraged ETF, meaning that the expectation is that UPRO will go up 3x that of the S&P 500).
The only thing to consider is that, with lighter summer trading volume, there’s not a lot of conviction behind the move. But, with things shaping up the way they are, my best advice is to remain very defensive, use any rallies to buy puts and to prepare for the worst…while hoping it doesn’t come.
Ken Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990. Try Power Options Weekly today and receive 2 weeks for the price of 1 for only $19.95.
Editor’s Note: Thanks to an editorial error, the original version of this article incorrectly referred to MUR as a household cleaner company. It has since been corrected, and we apologize for the confusion.
