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Trade of the Day: Clorox (CLX)

A bearish bet on Clorox should play out nicely as the market corrects

   

Stocks got clobbered Thursday as rumors of rising interest rates continued to swirl. Lower stock prices is good for buying put options, and we’ve got a great one to recommend. But first, let’s dive into the current market analysis.

Market Outlook

Our indicators are giving neutral to bullish readings, a downgrade from last week’s bullish to neutral. But similar to last week, the bullishness aspect of the readings has an uneasy feel about it, as is usually the case when volatility increases. All too often in the recent past we have seen markets that shoot first and ask questions later.

A primary reason behind our uneasiness is seen in our internal indicators, primarily the 200-day moving averages index. As we mentioned, last week the indicator’s own 50-day moving average fell below the indicator’s 200-day moving average, which is the basis for a primary sell signal. This sell signal last occurred in the summers of 2011 and 2010, in front of double-digit percentage declines by the stock indexes. And its most important sell came in June of 2007, several months in front of the financial collapse of 2008.

We don’t mean to imply that a similar collapse is in the cards immediately, we just want to point out how reliable on the downside this indicator has been. The first confirmation that something bad might really be in the works is for the major stock indexes to fall below their 200-day moving averages. For the Dow, that would mean falling below 14,150, the S&P 500 below 1520, and the Nasdaq below 3205. All of the indexes fell below their 50-day averages on Thursday, and naturally those 200-day averages would drift lower if the index prices continued to fall.

The culprit behind the current volatility is rising interest rates. Many analysts and media types are blaming the Fed for this, but does anyone really believe rates are going to stay at historic lows forever? The Fed can be blamed for pushing rates so low to begin with, but not for allowing them to rise again sometime in the future. That rates have been volatile without any significant economic growth is a telling sign. By the numbers, the U.S. Treasury Fund (TLT) is currently sitting at critical support. Any move lower following today could set the stage for a fall to the $93 area, with a concomitant rise in interest rates.

With our indicators continuing to signal more volatility upcoming, options players should continue to step up their use of bearish positions. That means buying more puts than calls. Here’s a trade to get you started.

Recommendation: Buy Clorox (CLX) October 75 put options at $1.50 or lower. After entry, take profits if the stock price hits $77.50, or the option price reaches $2.80. Exit if the stock price closes above $83.80 or the option price falls to $1.10.

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Article printed from InvestorPlace Media, http://investorplace.com/247trader/trade-of-the-day-clorox-clx/.

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