Our indicators are giving bullish readings, unchanged for several weeks now. But that is masking a struggle the major indexes have been locked in for the past couple weeks. This struggle is not a surprise given that stocks had a strong advance in January and had become very overbought, and more selling is certainly possible. If that comes to be, the overall trend will still remain bullish as long as the Dow closes above 13,520, the S&P 500 above 1465, and the Nasdaq above 3090. Those prices represent the index’s current 50-day moving averages.
Until the major indexes break below their 50-day moving averages and the internal indicators and sector indexes begin breaking down, the current struggle should be treated as a pause in the bull market, not as an imminent bear market.
Slow Growth in Key Areas
The current softness is finding its cause not in the U.S. but in global markets. While most remain bullish, it is three relative stragglers that stand out: China, Brazil and emerging markets. We can see the weakness in those areas in the iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI), iShares MSCI Brazil Index ETF (NYSE:EWZ) and iShares MSCI Emerging Markets Index ETF (NYSE:EEM), respectively.
Those three markets are seen as the primary growth drivers in the coming years. And Europe still remains a huge economic question mark. Of course, some say that current stock prices don’t really represent current economic conditions but instead are being driven higher mainly by central bank money printing. We agree with that assessment. Inflation might not be showing up in labor markets, but it is certainly noticeable in financial markets.
One sign that economic conditions truly are improving would be a positively sloped yield curve (at least in the days before Fed interference). In other words, long-term interest rates higher than short-term rates. An indication of that taking place would be weakness in long-term Treasury bond prices, as tracked by iShares Barclays 20+ Yr Treasury Bond ETF (NYSE:TLT). And that has been the case since July, so much so that TLT has fallen into a primary bearish trend. Although it has stabilized over the past week, TLT will remain bearish as long as it stays beneath its 50-day moving average, currently at $120. Then again, before proclaiming a positive yield curve as a sign of economic strength, keep in mind that a lot of money is coming out of Treasuries to be redeployed in stocks.
Trim Your Trading, But Don’t Bail Completely
With our indicators remaining bullish, options buyers should continue to buy calls. But lighten up on your buying, as a short-term market top certainly looks to be forming. With that in mind, continue to prune your portfolio of current call positions that haven’t been working. And as always, keep some puts in your portfolio.
One undervalued call option to start off with is in Mattel (NASDAQ:MAT).
Recommendation: Buy MAT April 41 call options at 70 cents or lower, when the stock price is $39.60. After entry, take profits if the stock price hits $41.20 or the option price reaches $1.40. Exit if the stock price closes below $38.80 or the option price falls to 50 cents.
InvestorPlace advisor 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. Try Maximum Options today for 2 months for only $99.