Our index indicators are giving bullish readings, unchanged from last week. But one change from a week ago is that momentum has picked up again, as the Dow Industrials blew through a possible “double-top” formation and broke to new record highs. It was joined in record high ground by the S&P 500, and the Nasdaq continues to draw closer to its all-time high set almost 15 years ago.
The bullish trends will remain in place as long as the indexes remain above their 50-day moving averages, which for the Dow is currently at 16,960, the S&P 500, 1,975, and the Nasdaq, 4,490.
Our internal indicators reflect the improvement in the indexes but are largely unchanged from a week ago. The 200-day Moving Averages Index has turned completely bearish, and that is always something to keep an eye on. But the Advance/Decline Index and Cumulative Volume Index remain bullish.
A positive change is that both of those indicators were in downswings last week, but are trending up this week. Seven of the nine major S&P sector funds are bullish, down from eight of nine as last week. The laggards are Energy and Utilities, regarded by many as defensive sectors. Momentum has reversed course in the volatility indexes, and they are slipping lower as well.
U.S. Treasuries (TLT) continue to drift lower even after the Fed signaled no immediate change to monetary policy. TLT is bullish to neutral and will continue to be so by staying above its 200-day moving average, currently at $112. A positive trending TLT is bullish for interest rates, but history has shown that stocks can continue to rally even should rates creep higher, especially if higher rates are due to an improved economy. Junk bonds have recovered a little over the past few days, but they have still fallen into a primary bearish trend.
The U.S. dollar remains in a strong uptrend, and along with that comes weakness in commodities. Copper is in a primary bearish trend, as are gold and oil. While bearish commodity trends connote something negative about global economic conditions, a positive development is that lower commodity prices keep a lid on inflation and interest rates.
With momentum returning to stocks and trends remaining negative for bonds and commodities, options traders should begin weighting more toward buying calls than puts. (But keep some puts in your portfolio, as increasing caution should still be your watchword.)
In this environment, today’s recommendation is a bullish trade in a sector that did particularly well in Thursday’s session: telecom. Sprint (S) is up nearly 19% after announcing its “iPhone for Life” deal with Apple (AAPL). There have been some questions about the long-term viability of this offering for Sprint’s bottom line, but it is certainly boosting the stock’s short-term momentum – which provides a strong opportunity for options traders.
Buy the S Nov 7 Calls (S141122C00007000) at $0.50 or lower. After entry, take profits if the stock price hits $7.60 or the option price hits $1.00. Exit if the stock price closes below $6.50.
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