We recently explained one bearish technical signal that we’re watching very closely, but there’s another reason we’re wary of this market’s bullish ability.
The second issue that we have right now that we’re a little concerned about is that we have a market that is rallying in an unusual way. Usually, the market takes off to the upside and you see a fairly regular rotation where once sector will come into favor, then the next and the next.
For example, what we usually look for would be financials and technology, industrial stocks, which we have seen recently. However, financials and technology lagged. Then, coming up from behind would be healthcare, consumer staples and utilities.
Well, this month, we’ve actually seen that flipped upside down. So, this month we haven’t a bad market, so things have been OK but actually the best-performing industry group is the utilities, which is fairly defensive. You could say from a sector-rotation perspective, it’s OK for us to be bullish but we’re probably very, very cautiously bullish. We’re not very optimistic another extension to the upside like we had in December and January.
By contrast, if we’d seen technology stocks way up while healthcare and utility had been lagging, that would be a confirmation that we’ve got a nice bullish market. So, we really are still in this limbo where it looks like the market may be channel-bound to a certain extent.
The way that we usually handle a market like is we look for stocks that are relatively the strongest, fundamentally speaking, so that they’re performing the best as call opportunities versus those that are performing the worst; either they’re unprofitable or they may be in a turnaround situation or they’re disrupted by one thing or another.
Essentially, what we’re looking for bearish put option trades would be those stocks that are struggling internally or are subject to unusual uncertainty from the outside – regulatory problems and things like that.
Investor Place advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.