Trade of the Day: Lowes (LOW)

I recommend buying calls in a 2:1 ratio to puts

   

Our indicators are giving bullish readings, unchanged from last week, as the Dow and S&P 500 continue to push toward the all-time highs they reached during the summer of 2007. The Nasdaq still has a ways to go to reach its all-time high set in the year 2000 during the internet bubble, but it surpassed its 2007 high a year ago. The bullish trends will remain in place as long as the Dow stays above 13,250, the S&P 500 above 1435, and the Nasdaq above 3045. Those prices represent the index’s current 50-day moving averages, which have been rising along with the price indexes.

Also, eight of nine S&P sector index funds are in primary bullish trends. The Utilities SPDR (NYSE:XLU) is the only bearish index. And seven of eight global index funds are in primary bullish trends, and the laggard, the iShares MSCI Brazil Index ETF (NYSE:EWZ), is strengthening. So the “risk on” appetite for stocks remains in play.

The strength in stocks is also evident by weakness in U.S. Treasury bonds, as represented by the iShares Barclays 20+ Yr Treasury Bond ETF (NYSE:TLT). We’ve been watching TLT do battle with a bearish “lower highs” trading pattern that began last July. During that time TLT has set and successfully tested support at $118. But the prolonged weakness has dragged its 50-day moving average down to its 200-day average, and the threat is real that a dreaded “death cross” will be made. If that happens it will re-enforce the importance of $118 support. Should that support fail, long-term interest rates could begin rising in a significant way.

Most likely XLU and TLT are simply being sold by traders looking to raise money to buy stocks. And in their early stages, rising interest rates will not derail a rising stock market. In fact, rising rates are often associated with an improving economy, which is a good thing for stocks. And rates would be rising from historical low levels. But given a lack of convincing economic data, rates cannot rise too far before having a significant economic effect. And also still on the table, the daily shenanigans in Washington are not helping Treasury prices.

With our indicators remaining bullish, options buyers should continue to buy calls. But again, don’t go overboard, as stocks are overbought and would really benefit from a short-term pause and pullback. The ongoing budget debates may provide an opportunity for exactly that. So continue to sprinkle puts into your portfolio, at about a one to two ratio compared to your call buying.
Recommendation: Buy Lowes Companies (NYSE:LOW) Apr. 39 call options at 85 cents or lower, when the stock price is at $37. After entry, take profits if the stock price hits $38.90 or the option price reaches $1.70. Exit if the stock price closes below $36  or the option price falls to 60 cents.


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