Going on three weeks now, the major stock indexes have been struggling to move forward. This is not a surprise given the strong surge stocks made in January, and it is only natural for a pause to occur. In fact, that the indexes have only paused and not pulled back is a positive sign. But if a pullback comes about, the overall trend will still remain bullish as long as the Dow closes above 13,600, the S&P 500 above 1475, and the Nasdaq above 3110. Those prices represent the index’s current 50-day moving averages.
All nine major S&P sector index funds are bullish. Until the major indexes break below their 50-day moving averages and the internal indicators and sector indexes follow, what we are seeing is simply a pause in the bull market, not an imminent bear market. A best case scenario would be for the indexes to continue moving sideways for a while until they work off a still overbought technical condition.
We’ve mentioned several times that the strength in stocks has more to do with central bank money printing and less to do with actual economic conditions, and that continues to be the case. But whatever the reason, the trend is bullish and that is how traders should approach it. More and more, we’re hearing of a “great rotation” underway from bonds to stocks, and that line of thinking seems to be gaining more and more believers. It is something that could at first help stocks but eventually could cause problems.
As traders and investors sell bonds, long-term interest rates rise. Rising rates by themselves should not derail a stock rally, at least not until central banks begin tightening policies. But rising rates affect bond prices, and that could create a more rapid move out. Long-term Treasury prices have been bearish for months, and the iShares Barclays 20+ Year Treasury Bond ETF (NYSE:TLT) recently moved into a primary bear market relative to its key moving averages. TLT has also taken out key support at $118, and is now trying to establish new support at $116. Eventually, higher rates affect consumer spending and corporate profits, and ultimately stock prices.
With our indicators remaining bullish, options buyers should continue to buy calls. But also continue to prune your portfolio of current positions that haven’t been working as well as planned. And as always, keep some puts in your portfolio.
One candidate for an undervalued options trade is in Bank of America (NYSE:BAC). Call options on this stock are consistently in the top five for options volume for both market makers and individuals, meaning it has great liquidity. I’ve found a strike price and month that are extremely undervalued right now, meaning you don’t need to set aside much capital to follow the steady rise of BAC.
Recommendation:Buy BAC Apr 12 call options at 68 cents or lower, when the stock price is around $12.10. After entry, take profits if the stock price hits $13.00 or the option price rises to $1.30. Exit if the stock price closes below $11.70 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.