Our internal indicators continue to support the bullishness in the indexes, as the Advance/Decline Index and Cumulative Volume Index are bullish, unchanged from a week ago. The 200-day Moving Averages Index has now slipped below its own 200-day moving average, but as we’ve mentioned, it has done that a handful of times recently without affecting the current bull run. But it is undoubtedly in a declining trend, and requires close watching.
More important than current stock trends are trends in the bond markets, specifically the 20+ Yr. Treasury Bond ETF (TLT). Treasury yields will be the most directly affected when the Fed begins to cut back on its quantitative easing. TLT has fallen below key recent support and is again in a bearish trend relative to its key moving averages. This sharp move lower in TLT’s price follows a strong move higher that ended just one month ago. That Treasury bond prices have become so volatile is a warning sign itself. And it is also a likely precursor of what kind of volatility will ensue when the Fed really does begin to cut back on its easing policy.
Another precursor is also apparent in the stock market. While eight of nine S&P sector funds remain bullish, the one that isn’t, the Utilities SPDR (XLU), is generally sensitive to rising interest rates. Both XLU and also the Dow Utilities Average (DJU) crashed through their 50-day moving averages over the past week. But also interestingly, both have seen their slides halted at their 200-day averages. Should those averages hold as support it will be a welcome relief for utility investors. But is will also be another example of how much trading these days is controlled by machines reading charts and numbers.
With our indicators remaining bullish, options players should continue to weight toward bullish positions. But continue to take some tactical bearish positions such as buying puts. Markets are becoming more on edge, and rising bond market volatility can easily spill over into stocks.
Here is one such tactical bearish play to get you started:
Buy Campbell Soup (CPB) July 42 put options at 55 cents or lower. After entry, take profits if the stock price hits $41.90 or the option price reaches $1.40. Exit if the stock price closes above $45.30 or the option price falls to 30 cents.
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