Stocks continued their push higher over the past week, and the momentum does not appear ready to stop.
While overall market volatility has calmed down, the root cause of potential volatility continues to be statements made by Federal Reserve officials concerning the direction of interest rates, particularly U.S. Treasury yields. Currently Fed officials are continuing their backtracking from earlier hints that they may begin to slow the pace of the Fed’s bond buying. This is evident in the action of the 20+Year Treasury Bond ETF (TLT). TLT looks to have made at least a temporary bottom in the $106.40 area, and until Thursday had made a nice bounce off of it. But this type of price action by TLT has happened many times during a downtrend that began last November, and if that pattern persists TLT will eventually begin to head lower again.
A reason for continuing weakness in TLT, even if the Fed doesn’t go through with its “tapering” plans, could be the specter of rising inflation. Both standard measures for U.S. inflation came in above expectations for the most recent measuring period. Rising oil prices are one reason for the increases. But loose monetary policies, which bond vigilantes and also gold bugs have been highly critical of, may also be starting to contribute. If bond traders on a large scale begin to sniff inflation, bonds could see a tide of selling that even increased Fed action is unable to stem.
With our indicators continuing to give bullish readings, options players should continue to favor buying calls over puts. But as always, don’t put all of your eggs in the call basket. Sentiment is still capable of turning on a dime, and the relatively lower trading volume of summer would exaggerate a downturn.
For those who are still looking for call options exposure, my systems have shown this is a good prospect for the coming weeks.
Recommendation: Buy Lam Research (LRCX) September $52.50 call options at $1.35 or lower. After entry, take profits if the stock price hits $53.50 or the option price reaches $3.00. Exit if the stock price closes below $48.10 or the option price falls to 80 cents.
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