Our index indicators continue to give bullish readings, unchanged from last week, as the indexes have overcome their struggles with their 50-day moving averages and moved decisively higher. The bullish readings will remain in place as long as the Dow stays above 15,020, the S&P 500 above 1620, and the Nasdaq above 3420. Those numbers represent the index’s 50-day moving averages.
Our internal indicators are not as unanimous with their bullish readings. 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 plod along below its own 50-day and 200-day moving averages. While it is our only bearish indicator, we continue to mention it because of its track record of forecasting major and eventually destructive market moves. With that in mind we will continue to monitor it closely, but for now more belief should be put in the bullish indicators.
The root cause of the current market volatility continues to be uncertainty over the direction of interest rates, particularly U.S. Treasury yields, and the cause of that uncertainty can be laid at the feet of the Fed. Highly accommodative monetary policy is what has driven stock prices higher, and any hint of that policy ending is enough to send stock traders into a tizzy. Fed officials have been busy over the past few weeks backtracking from earlier statements they made hinting at a possible policy change. That backtracking has for the moment brought some money flow back into Treasuries, but the 20-Year Treasury Bond ETF (TLT) remains in a bearish trend and from a chart perspective looks to be in danger of falling further.
Also contributing to the volatility is the typical summer slowdown in trading volume, which tends to exaggerate moves in both directions. The volatility is easily visible in stocks and bonds, but it is also present in otherwise lower-volatility assets such as currencies, particularly over the past couple months. Just another sign that the Fed has painted itself into a corner from which it is going to be difficult to get out of without causing some widespread market disruption. Maybe that is what the 200-day Moving Averages Index is reflecting.
With our indicators giving bullish readings, options players should favor buying calls over puts. But as always, don’t put all of your eggs in the call basket, as stocks are currently highly dependent on rumors and speculation, and one nasty headline or Fed comment can send stocks and bonds tumbling quickly.
Recommendation: Buy Sony (SNE) October 24 call options at $1.25 or lower. After entry, take profits if the stock price hits $24.40 or the option price rises to $2.40. Exit if the stock price closes below $21.10 or the option price falls to 90 cents.
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