Stocks spent the past few days struggling to maintain the momentum they built up during the first few weeks of the month. The indexes certainly look toppy, and a pullback may be in store. But that could be just what the doctor ordered to get things rolling again.
Our indicators are giving bullish readings, unchanged since the beginning of 2013. But unlike the past few weeks, the indexes now look like they are ready to take a long awaited “pause to refresh,” or even a small pullback. But as we wrote last week, any pullback is likely be met with buying activity as investors who have been on the sidelines this year rush to get in. And it would take a severe and entirely unexpected pullback to derail the current bullish trend. That bullish trend will remain in place as long as the Dow is above 14,030, the S&P 500 above 1515, and the Nasdaq above 3175.
Our internal indicators continue to support the bullishness of the indexes. The Dow Transportation Average and Dow Utilities Average are bullish, as are all nine major S&P sector funds. Among our internal indicators, the Advance/Decline Index and Cumulative Volume Index are bullish, but the 200-day Moving Averages Index continues to wrestle with its own 50-day moving average. In the past this indicator has been out in front of major market sell-offs, but although it is struggling compared to the other indicators, it is not close to signaling major trouble ahead.
Indicative of the pause being taken by the indexes, safe haven indicators are showing some vigor. The U.S. dollar, although choppy recently, remains in a strong bullish trend relative to its key moving averages. That trend will remain in place as long as the US Dollar Index Bullish ETF (NYSE:UUP) is above $22.20. A strong dollar has several interpretations, one of which is a “flight to safety.” But it could also be a sign of global money moving into U.S. stocks. And whatever the reason for dollar strength, a side effect is weaker commodity prices, including oil, which should be beneficial to U.S. consumers and the economy.
U.S. Treasuries, the key harbinger of interest rates, have also seen some renewed strength over the past week. But Treasury prices remain in a downtrend that began last summer. The first step toward breaking that downtrend would be for the 20+ Year Treasury Bond ETF (NYSE:TLT) to move above its 50-day moving average at $117.70. But that is only the first step. It would still have its 200-day moving average at $120 to overcome as well as a “lower highs, lower lows” chart pattern to rectify. Higher Treasury prices of course mean lower interest rates, and vice-versa, so TLT remains a chart to keep an eye on.
The key indicator for all traders and investors this past week was the Federal Reserve meeting and what Chairman Ben Bernanke had to say following it. And the Chairman gave the markets what they wanted to hear, which is more cheap liquidity to keep the pumps primed. As long as that is the case, options buyers should continue to favor buying calls. But as we always say, it also is a good idea to hold some cheap puts as portfolio insurance “just in case.”
Recommendation: Buy Pitney Bowes (NYSE:PBI) May 15 call options at 80 cents or lower, when the stock price is around $15.20. After entry, take profits if the stock price hits $16.30 or the option price reaches $1.50. Exit if the stock price closes below $14.7 or the option price falls to 50 cents.
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