There’s no question about it: This is definitely a bear market, and it looks to me like it’s ultimately going to continue to move lower. My indicators support this and are giving bearish readings.
The markets are very oversold, but that doesn’t mean a thing to me when we see these kinds of declines. Still, as I’ve been careful to remind you, it is common for a bear market to experience very sharp rallies that can be much more extreme than you might think.
And, remember, U.S. markets are closed on Monday, Feb. 15, in observance of Presidents’ Day, and the sessions leading up to a market holiday tend to have a bullish bias.
However, I’ve been saying for a long time that the U.S. economy is moving toward a recession, and the action in the market continues to confirm that thesis. Last week, I cited the low gross domestic product (GDP) reading of just 0.7% for the fourth quarter of 2015 and the fact that tax receipts as a percentage of GDP are over 18%. These are just two reasons why I’m maintaining by bearish outlook, but I gave several more supporting details on Jan. 29.
The sector that’s really getting hit the hardest right now is the financial sector, and there are a few causes for that. As the Treasury yield curve continues to flatten, banks’ net margins contract, which in turn has a negative impact on their revenues. Additionally, many banks — especially the European banks — are holding too much questionable debt. European banks are on the path to disappearing and, while their stockholders are going to get hurt badly in the process, I expect that European governments are eventually going to have to step in and help them.
The energy sector is not doing much better and, while there were some rumors of production cuts again this week, I think oil prices are going to continue their slide, taking oil-related issues with them. As I mentioned above, we could see a sharp rally sooner or later, despite this bear market, and my advice for such a situation remains the same — establish bearish positions on any rallies, and take profits quickly when they are available.
Oil may be up this morning, but I do no expect the strength to last. So, with more pain in store for the energy names, let’s establish a bear market play in Dynegy (DYN).
Buy to open the DYN June 7.50 Puts at $1.10 or lower. DYN shares closed Thursday at $8.86.
After entry, take profits if DYN hits $7.50 or the option hits $1.60. Exit if the stock price closes above $9.60 or the option price hits $0.90.
Due to the Presidents’ Day holiday on Monday, Feb. 15, look for your next Trade of the Day to hit your inbox on Tuesday, Feb. 16.
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