Trade of the Day: Microsoft (MSFT)

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My indicators are back to giving bearish readings. Despite any short-term rallies, I continue to see the S&P 500 attempt to retest the lows it made on Aug. 24 at 1,867. In fact, I think we’ll go even lower than that level before everything is said and done.

Part of the reason for that is because we remain in a very dangerous time for the market. This is a historically weak period of the year, as the market typically declines as September comes to a close. This year, however, we could see that decline extend as far as late October.

The overarching reasoning that may help explain why my bearish outlook hasn’t changed in many months is that when the market broke below its extended seven-month trading range in August, it was a very negative signal, and it’s going to take a lot of time to repair the damage.

You may have heard the old adage that, “When they raid the house, they take all the girls — and the piano player.” Essentially, this means that the stocks that have held up the market in this most recent decline will eventually begin to crumble, and eventually everything is likely going to suffer.

If the Fed were to raise rates eventually, the U.S. dollar would strengthen, which would be negative for the world and emerging markets. That being said, I honestly don’t believe we’ll see higher rates because that would be disastrous for the debt of the United States. With the amount owed much higher than it has ever been, if the Fed increases rates, it will increase the already-dangerous debt dramatically.

We’re also coming into an election year, and the Fed is unlikely to increase rates because it wants to continue to stimulate the economy during this time. However, if the Fed does increase rates, the bottom line is that I think the market will go down further.

But, again, I don’t think that will happen. There’s no good way out for the Fed now, because if it doesn’t raise rates, it will be taken as a sign that “the economy is too weak.” And, if the central bank does raise rates, a strong dollar will have dramatically negative effects on emerging markets around the world. It’s a no-win situation for now.

The takeaway remains the same this week: On any rally, take the opportunity to enter into bearish positions, such as put options, as every rally since the August decline has been sold off to some degree.

To that end, today I’m recommending one such bearish trade in legacy tech.

Buy to open the Microsoft Corporation (MSFT) Nov. 20th $42 Puts (MSFT151120P00042000) at $1.25 or lower. After entry, take profits if the stock price hits $40.70 or the option price hits $2.70. Exit if Microsoft stock closes above $45.50.

If after three days you still have not gotten the position filled, cancel the order and watch for new recommendations, as the profit probabilities may no longer be valid.

Additionally, if the option or its underlying stock does not hit its target, or if the stock does not close at or below its sell signal price within three weeks of entry, close the position. I do not recommend holding an option play for more than three weeks.

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