Trade of the Day: Johnson Controls (JCI)

Follow the bullish tape to call options

   

Our indicators are giving bullish readings, as they have for all of 2013 so far. Against many expert prognostications, the major indices continue to climb higher. That so many are predicting a pullback seems to be working in favor of stocks. From a contrarian point of view, it means a lot of money is still on the sideline waiting to get in. And that, in turn, is a sign that pullbacks will be met with buying activity, ensuring that the primary bullish trend remains in place. And it will remain in place as long as the Dow stays above 13,930, the S&P 500 above 1505, and the Nasdaq above 3160.

Our internal indicators are supporting the moves being made by the indices. From a Dow Theory standpoint, the Dow Transportation Average is in new high ground, although the Dow Utilities Average has yet to follow. But that could be a sign that bullish traders are favoring more aggressive stocks and sectors. Also, all nine major S&P sector funds are bullish, as are the Advance/Decline Index and Cumulative Volume Index. The 200-day Moving Averages Index continues to wrestle with its own 50-day moving average, but the shorter-term 50-day Moving Averages Index is showing improvement.

One might expect that with stocks moving higher, safe haven indicators such as the U.S. dollar and Treasuries would be weaker. But instead, UUP has been rocketing higher, so much so that in the space of just a few weeks its trend has changed from primary bearish to primary bullish. A strong dollar can be beneficial for stocks and the economy, as it is a sign that international money is moving into the U.S. stock market. A strong dollar also pressures commodity prices, including oil and gasoline, which is a boon to U.S. consumers and their widely watched spending habits.

Contrary to US Dollar Index Bullish ETF (NYSE:UUP), the other safe haven, the 20+ Year Treasury Bond ETF (NYSE:TLT) continues to struggle. But this, too, is beneficial for stocks, as it is a sign that money is moving out of low-yielding bonds and into stocks. The “great rotation” that many expect, ourselves included, has not yet begun in earnest, but that is also a good thing. Rapidly rising interest rates are never good for stocks or the economy. That day of reckoning is still to come. For now, TLT is looking at support in the $110 area. A slow drift lower to that level would not be a bad thing. But a hard break below it would be.

Until further notice, and that notice seems to still be far out in the future, financial markets will continue to be all about the Fed, and the Fed continues to say that cheap money will rule the day. That means options buyers should continue to favor calls. But don’t overlook puts, as they are cheap, and also because there will always be stocks that fail to follow the herd higher. It never hurts to have some cheap portfolio insurance around “just in case.”

Recommendation: Buy Johnson Controls (NYSE:JCI) July 36 call options at $1.20 or lower, when the stock price is around $34.90. After entry, take profits if the stock price hits $36.70  or the option price reaches $2.10. Exit if the stock price closes below $34.00 or the option price falls to 90 cents.

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