Stocks saw some more volatility Thursday, continuing a week-long pattern. And some key indicators are saying the volatility is likely to continue.
The S&P 500 and Nasdaq indexes dropped this week, confirming a bearish-to-neutral trend, the Dow is the only one that remained above its 50-day moving average this week.
But all is not rosy in the Dow’s arena. The Dow Transportation Average, one of the components of Dow Theory, has fallen below its 50-day moving average. As have S&P sector funds energy, financial, industrials, materials and technology. In fact, the materials and technology funds are also below their 200-day moving averages, and energy is close to joining them. All this is evidence of a market mood that has become very defensive. It is not a stretch to say that the only reason a larger sell-off hasn’t occurred is because investors feel they need to continue to play along with the Fed and other central banks, and are doing so by hiding out in conservative sectors and stocks.
As would be expected in a time of investment caution, the U.S. Dollar Bullish Index Fund (NYSE:UUP) and the Barclays 20+ Yr. Treasury Bond ETF (NYSE:TLT) continue to show strength. TLT in particular is cementing a reversal of a months-long downtrend. How much higher it can climb given current historically low interest rates is an open question, and frankly is not one we would like to see answered. Lower interest rates moving forward would be a sign of deflation possibly taking hold in the economy. Say what you want about the inflation’s evils, but almost everyone agrees that deflation is an even more dangerous enemy.
With these bearish indicators, options traders should shift their focus to puts (while not ignorning calls). With the Fed continuing to prop up the market though, you should be able to find good bargains on bearish plays, so be choosy about your entry price.
Here’s a put to get you started in Penn West Petroleum (NYSE:PWE).
Recommendation: Buy PWE June 9 put options at 75 cents or lower, while the stock price is around $8.80. After entry, take profits if the stock price hits $7.90 or the option price reaches $1.30. Exit if the stock price closes above $9.30 or the option price falls to 50 cents.
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