Indicators Point to Favoring Calls

Weakness in TLT and the dollar indicate a risk-on environment

   

The fiscal cliff agreement gave a boost to markets, and our indicators are confirming those bullish readings, unchanged from two weeks ago. The best course of action is to focus your options buying on calls in this risk-on environment–and here’s why.

Indicators Show Bullish Trends

These bullish trends will be in place as long as the Dow remains above 13,130, the S&P 500 above 1420, and the Nasdaq above 3010. Those prices represent the index’s current 50-day moving averages.

Eight of nine S&P sector indexes are in primary bullish trends. Utilities are the only bearish indexes. And seven of eight global indexes are in primary bullish trends. Brazil is the laggard, and even that index has taken on a more bullish posture. So while it has seen some volatility along the way, the risk-on appetite for stocks remains in play.

Weakness in “Safe Havens”=Risk-On Environment

The move toward riskier assets is reflected by weakness in two safe haven indexes, the iShares Barclays 20+ Yr Treasury Bond ETF (NYSE:TLT) and the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP). TLT in particular is taking a beating as traders sell bonds to buy stocks. The index rallied back up to its 50-day moving average a week ago, but has since plunged back below its 200-day average, in the process re-affirming a “lower highs” bearish trading pattern. A break below $118 by TLT would be a danger sign for Treasuries, which in turn would mean that higher long-term interest rates might be on the horizon.

But weakness in Treasuries might be mitigated by weakness in commodities. Most commodity indexes are bearish, a sign that traders do not believe that inflation is on the immediate horizon. Above all, inflation is the fundamental long-term driver of interest rates. Both Treasuries and commodities are currently bearish as money heads for the stock market. But it will be interesting to see which resumes a bullish trend first. Keep an eye on both TLT and the SPDR Gold Trust (NYSE:GLD).

With our indicators remaining bullish, options buyers should continue to buy calls, but don’t go overboard. Stocks have had a huge jump and may need some time to refresh. Plus, the trigger for the current bullishness was a short-term budget agreement in Washington. Long-term problems remain, so buying puts should also be on your menu, even if it is at a lower ratio than your call buying.

One call option that my Power Options system has identified as  volatile and liquid trade is in U.S. Steel (NYSE:X).

Recommendation:

Buy X Feb. $27 call options at 90 cents or lower, when the stock price is around $25.40. After entry, take profits if the stock price hits $28.10  or the option price reaches $2.3. Exit if the stock price closes below $24 or the option price falls to 50 cents.

InvestorPlace advisor Ken Trester is editor of the popular Maximum Options program. 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 Maximum Options today for 2 months for only $99.


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