The action in the markets remains volatile, and rising volatility many times has signaled an impending change in the prevailing trend.
Some relief for stocks may be coming by way of U.S. Treasury bonds, which for the past couple days has managed to halt its massive sell-off that began in early May. But the current bounce may be very short lived. If TLT fails to hold above $108, no real chart support exists above the $93 area. Barring a sudden change in market sentiment or Fed policy, bond market volatility looks like it has a ways to go before it has run its course. And that is likely to keep stock indexes volatile also.
One also has to wonder how much longer stock investors can stay hooked on the “bad news is good news” idea. All during the Fed’s easy-money policy investors have been buying stocks on the belief that as long as the economy is weak, the Fed will print money, which in turn will support stock prices. But it has been more than four years of easy money now and while the financial system has improved, for most people the economy has not. Eventually that reality will find its way into corporate profit numbers and stock valuations.
With our indicators giving mixed signals, options players should look for an equal number of bullish and bearish positions. Buy more puts than calls, but offset that bearish bias with conservative bullish plays such as put credit spreads. The coming week should have a bullish bias, as it is the first week of a new month and also a holiday week. Both of those factors are generally bullish.
Here’s a trade to get you started on this shortened week:
PNC Financial (PNC) is a money center bank. Banks actually benefit from higher long-term interest rates, as it widens the margin between what they pay for funds and what they earn on loans. The stock has been in an uptrend since November. It recently broke above resistance at $73, paving the way for a continued move higher.
Recommendation: Buy the PNC Aug 77.5 Call (PNC130817C00077500) at a suggested price of 70 cents ($70 per contract).
After taking the position, enter a good-til-cancelled contingent order to sell this option if the stock hits its target price of $76.50. That should give you an option price of about $1.70, for a 142% profit.
Close this position and cut losses if the stock closes below $72.10, when the option price should be about 40 cents.
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