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Despite the strength the market has shown recently, my indicators are giving their first sell signals since February, so something is happening internally that, plainly, is not good. My feeling is that the market may become volatile for a while, but then we’re probably going to see some kind of meaningful pullback.
That’s why I don’t want you to waste any time opening today’s trade in WFC:
Buy to open the Wells Fargo (WFC) Jun 44 Puts (WFC160617P00044000) at $0.95 or lower.
After entry, take profits if WFC hits $43.50 or the option price hits $2.20. Exit if WFC closes above $48.60.
Having experienced a heavy rally over the past six weeks, we’re looking at an equity market that’s simply overbought, so you’d expect to see some kind of correction here. And the world is swimming in excessive debt. Eventually, that’s going to come back to haunt us. There’s just too much debt everywhere, and student-loan debt is a perfect example of that.
Money has been lent out at very, very low rates, and everybody’s taken advantage of that. That creates a real haunting cloud over the market. When you can borrow money on the cheap, there’s little incentive to be careful with the capital being deployed.
In other words, we’ll just continue to see reckless spending and inefficiencies until the bubble bursts once again. Normally I would say that utilities should be pretty safe because you’re still getting a pretty good yield, but, if interest rates change, that could affect the sector.
Professional commercial traders, otherwise known as the “smart money,” in the bond market are really short too. They keep expanding their short positions, and that is in the face of this rising equity market. I would say that there’s some real danger to the downside in the bond market, which means rates may rise, although it’s anybody’s guess.
My feeling now is that the Fed may hike interest rates again sooner than we think. However, because of Janet Yellen’s aim to keep the market propped up until the election cycle has come to a close, it’s uncertain whether she’ll actually do it.
With that said, commodity prices may come down again. It looks like they’re bottoming here, but, as I’ve said before, they’re making a complex bottom, and I think you’re going to start to see some moves to the downside again.
The high-yield market is still extremely illiquid and extremely dangerous, and I don’t think oil is going to continue to rally here. I’m kind of bearish on oil right now. It has been fluttering around near current levels, but I think this is about the top for a while.
On the topic of currency, the Japanese Yen has been jumping off the charts lately, making a very big move in a very short period of time. But, overall, I still say that the U.S. dollar is the best bet because everybody else in the world is not doing well at all.
Considering the bearish signals my indicators are showing, I recommend you build bearish positions via put options.
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