Our indicators are giving neutral to bullish readings, an upgrade from last week’s neutral. The improvement has come from all sectors, as eight of nine S&P sector funds are in bullish or neutral to bullish trends. The S&P 500 and Nasdaq are bullish, while the Dow is neutral to bullish. The Dow must cross back above its 50-day moving average at 13,070 to move back into a primary bullish trend.
Stocks are also receiving some help from traditional “safe haven” assets, particularly the dollar, which we track with the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP). UUP recently failed to overcome resistance at its 200-day moving average and has since fallen back below its 50-day moving average, placing it in a primary bearish trend. In somewhat of a divergence, the iShares Barclays 20+ Year Treasury Bond ETF (NYSE:TLT) has remained in a primary bullish trend. Weakness in safe haven assets is often a good sign for stocks, as it indicates that big investors are willing to take on more risk.
But for now taking on risk is on hold thanks to political events in Washington. Investors seem more intent on positioning their portfolios for potential “worst case” scenarios, prime among them being significantly higher taxes on investment returns and drastically slower economic growth. That posturing will continue to take place as long as the political posturing does also. And if politics overtakes common sense in Washington and the “fiscal cliff” is not resolved prior to the new year, things will get real ugly in the markets.
With our indicators continuing to strengthen, options buyers should continue to buy calls. But don’t neglect puts, in the event the fiscal cliff negotiations do not make enough headway in the coming days. Every day that passes without an agreement puts the calendar one day closer to January. And as it has been for the past few weeks, it continues to be a good idea to scale back on your trading on all levels until the political uncertainty clears.
Here is one trade that passes muster in the current economic situation. Buying inexpensive (less than a dollar) options is always a good idea, and that’s especially true now because it lowers your risk potential.
Recommendation: Buy Louisiana Pacific (NYSE:LPX) Jan. 19 call options at 55 cents or lower, when the stock price is around $17.40. After entry, take profits if the stock price hits $19.30 or the option price reaches $1.40. Exit if the stock price closes below $16.50 or the option price falls to 30 cents.
Ken Trester is editor 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.