Our indicators are giving bullish readings, unchanged from last week, as all three major price indexes continue to solidify their primary bullish trends. These bullish trends will be in place as long as the Dow remains above 13,180, the S&P 500 above 1428, and the Nasdaq above 3025. Those prices represent the index’s current 50-day moving averages, which have been rising along with the price indexes.
Our internal indicators are confirming the strength in the price indexes, as the 200-day Moving Averages Index, Advance/Decline Index and Cumulative Volume Index all are bullish. Also, eight of nine S&P sector indexes are in primary bullish trends. Utilities (XLU) is the only bearish index. And seven of eight global indexes are in primary bullish trends. So the “risk on” appetite for stocks remains in play.
However, though stocks continued their climb higher Thursday, beneath the surface some warning signs are developing.
The Utilities Select Sector SPDR (NYSE:XLU) weakness bears watching.
The XLU’s top 10 holdings are Duke Energy (NYSE:DUK), The Southern Co (NYSE:SO), Dominion Resources (NYSE:D), NextEra Energy (NYSE:NEE), Excelon (NYSE:EXC), American Electric Power (NYSE:AEP), First Energy (NYSE:FE), Pacific Gas and Electric (NYSE:PCG), PPL (NYSE:PPL) and Con Ed (NYSE:ED).
Utilities are hurt by higher interest rates, a possible trend change that is also evident in long-term U.S. Treasury prices (NYSE:TLT). We mentioned last week that TLT has been mired in a “lower highs” bearish trading pattern for several months, and that pattern shows no signs of ending. In fact, TLT is wrestling to stay above key support at $118. A break below that support could precipitate a fall to the $112 area, in which case higher long-term interest rates would be a real worry for not only stocks but also the economy.
Now, it could be that XLU and TLT are simply being sold by traders looking to raise money to buy stocks. And TLT could also be suffering from potential political problems as U.S. debt ceiling debates and a possible ratings downgrade loom on the horizon. But many traders, ourselves included, believe that a bond bubble has existed for years, being kept aloft by Federal Reserve machinations. The true enemy of bonds is inflation, and inflation stocks and indexes have shown some signs of strength over the past few days. This is a trend that bears close watching.
With our indicators remaining bullish, options buyers should continue to buy calls, but don‘t go overboard. Stocks have had a huge run-up, are overbought and may need some time to refresh. Plus, more U.S. budget debates await on the horizon, and the possibility of higher interest rates is also appearing on the radar. So, continue to sprinkle puts into your portfolio, even if it is at a lower ratio than your call buying.
One put option to get you started resides in the utility sector: Companhia Energetica (NYSE:CIG). Though not a part of the XLU, it is a Brazilian energy play and its put options are very cheap right now – one of my favorite qualities.
Buy the CIG Mar 10 Put options at 90 cents or lower. After entry, take profits if the stock price hits $9.20, or the put option price hits $1.70. Exit if the stock price closes above $11.80 or the option price closes below 70 cents.
InvestorPlace advisors Ken Trester and Jeff Carter are the editors 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.