Our indicators remain bullish, but things don’t look all that safe beneath the surface.
Our indicators are giving bullish readings, despite a week filled with disappointing global economic numbers. In fact, those numbers give even more credence to the possibility of global deflation, a notion that is backed up by some price action in commodities and currencies. Yet U.S. stock indexes continue to march higher, and that bullish trend will be in place as long as the Dow is above 14,700, the S&P 500 above 1585, and the Nasdaq above 3300.
Our internal indicators are supporting 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 again has fallen below its 50-day moving average, but it has been in that position for almost all of the past three months without impacting the indexes. And all nine S&P sector funds are bullish.
We mentioned that beneath the stock market’s surface, commodity prices are signaling that deflation may be lurking. The poster child for commodities is of course the SPDR Gold Trust (GLD), which has fallen more than 20% since topping out last October. And the Australian dollar, a commodity-based currency, has been getting crushed over the past month. And let’s not forget nor discount the aggressive monetary actions being taken by central banks. If inflation was even remotely on their minds, they would be throttling back their stimulus. But that has not been the case. If people exist that might know something the markets don’t, those people are central bankers.
The whiff of deflation also drifted back into the bond market. After moving lower over the first couple weeks of May, U.S. Treasury bonds, as tracked by the 20+ Year Treasury Bond ETF (TLT), reversed course on Thursday. Some of this reversal may have been a reaction to the recent price decline, but some of it also had to be a reaction to the disappointing economic numbers. TLT is bearish relative to its key moving averages, but a move back above $120 would change that. The increased volatility we are seeing in Treasuries as well as currencies gives the impression that a lot of very smart investors are very unsure of what might be brewing in the financial markets.
Nevertheless, our indicators remain bullish, and as long as stocks retain the momentum they have had over the first few months of the year, options players should continue to weight toward bullish positions. Here is one to get you started:
Recommendation: Buy Ford (F) July 15 call options at 45 cents or lower. After entry, take profits if the stock price hits $15.70 or the option price reaches $1.00. Exit if the stock price closes below $14.10 or the option price drops to 30 cents.
However, continue to take some tactical bearish positions such as buying puts, just in case.