Our internal indicators are neutral to bullish, unchanged from a week ago. The Advance/Decline Index and Cumulative Volume Index are bullish, as are all nine S&P sector funds. But the 200-day Moving Averages Index continues to tread water in bearish territory. For now more belief should be put in the bullish indicators, but the longer the 200-day Moving Averages Indicator remains bearish, the more attention that needs to be paid to it. And perhaps not coincidentally, it has been bearish for about as long as Treasury yields have been rising.
Speaking of Treasury yields, the Barclays 20+ Year Treasury Bond Fund (TLT) has again turned lower and looks like it is going to test support in the $106.50 area. That support arrested an earlier downtrend, but it is flimsy support at best, and the next possible support is $3 below that. Ominously, a look at the longer-term chart of TLT shows that the plunge in Treasury yields in 2011 (yields and interest rates move in the opposite direction of the price of TLT) might only be in the early stages of correcting.
Of course, the main reason rates plunged in 2011 is because the Federal Reserve embarked on its still ongoing quantitative easing monetary policy. So it should be no surprise that a give-back would be the natural response to that policy ending. As for stock prices, investors will need to balance the cons of higher interest rates versus the pros of a possibly stronger economy (the Fed has said it will end quantitative easing only if economic conditions warrant it). That process is sure to involve a lot of give and take, so some volatile times are likely still in store.
With our indicators continuing to give bullish readings, options players should continue to favor buying calls over puts. But momentum looks to be wavering, so try to include some puts in your portfolio as well. Sentiment is always capable of turning on a dime, and the lower trading volume of summer will exaggerate a downturn.
To take advantage of the current conditions, though, here’s an options trade that allows you to leverage the upside.
Recommendation: Buy NCR Corp. (NCR) September 36 call options at $1.15 or lower. After entry, take profits if the stock price hits $37.80 or if the option price reaches $2.60. Exit if the stock price closes below $34.00 or the option price falls to 70 cents.
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