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With regards to the broader equity market, my indicators are giving bullish to neutral readings. We wrapped up the last day of the month yesterday and, historically, the following four trading days after that have a bullish tendency, so the market is likely to maintain positive bias in the short term. This is exactly why I’m recommending a bullish call option in IBM.
Buy to open the IBM (IBM) May 160 Calls (IBM160520C00160000) at $1.60 or lower. After entry, take profits if IBM hits $159.40 or the option price hits $4.50. Exit if IBM closes below $147.60.
You can jump in the IBM trade today, and a bullish trade should offer some nice profits in the short term, but don’t mistake this with longer-term strength. Here’s why:
The S&P 500 Volatility Index (VIX) is not moving up at all. In fact, it’s been on the slide. We probably won’t see any major declines over the next several weeks as long as the VIX continues to move lower.
Following the VIX is one way of measuring when the market may experience a major trend change. If it was trending up, then I’d be concerned. This would suggest that there’s a lot more put-buying occurring, which could signal that a major pullback may be forthcoming.
Interestingly enough, the VIX is at about the same level where it was before the crash last August. Although it is moving lower, there is a real concern that investors may be getting too complacent in this market.
Furthermore, the S&P 500 is definitely at the top of its trading range. At current levels, the index has very heavy overhead resistance, which has been established over the past year or so. Looking at a chart, the benchmark index is in a real distribution pattern, so this really is a dangerous point in the market for long-term investors.
So, even though my indicators are bullish and these next several days tend to have a bullish bias, I would be very cautious. My gut feeling is that the market will move sideways over the next month before we head into May, at which point it will be time to “sell in May and go away” — unless, of course, you’re an options trader.
One area of the market that has been looking strong in recent weeks is the insurance sector, and I am leaning towards the bullish side on insurers, as they are currently in a strong financial position, generally speaking. However, there’s a lot of competition in this space. What we’re seeing is a big push to expand beyond traditional product offerings and introduce new strategies in an attempt reach out to a younger audience.
With regards to commodities, I am still bullish on gold, and I believe that it will hold near current levels, as the SPDR Gold Trust (ETF) (NYSEARCA:GLD) has a lot of support at the $115 level. On the other hand, I am leaning towards the bearish camp on crude oil for the long term. I see a lot of overhead resistance at the $40 per barrel price level. At these levels, there are a lot of producers taking positions here to lock in that price, which is a bearish sign. In my opinion, oil will either stay at current levels or move lower.
I don’t see any oil-producing nations that are willing to cut back on their output and, while there is a chance that they could freeze production at current levels, that doesn’t mean much. Iran is going to boost production as much as it can, so oil is kind of a wide-open market right now.
Lately, there have been a lot of rumors and news stories crossing the tape that have artificially bumped up the price of oil, but it is unlikely that they will be able to produce a sustained rally. At some point, investors will become numb to the fluff and focus primarily on the fundamentals of production and inventory data.
On the topic of interest rates, I had a strong feeling that Fed Chair Janet Yellen would not raise rates ahead of the summer selling season. Her comments were very dovish, so I just don’t see rates moving up much, if at all, this year. As someone who is aligned with the current administration, she has every incentive to avoid a rate hike, which would hurt the market and make payments on U.S. and corporate debt more expensive.
Again, this contributes to my longer-term bearish stance, but that doesn’t mean there isn’t some quick money to made with the bulls right now, especially in technically strong stocks like IBM.
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