Our index indicators are giving bearish to neutral readings, a downgrade from last week’s bullish readings. But as we suggested last week, those bullish readings were more a product of timing than trend, with increasing volatility being the real trend. The rising volatility trend has continued, and the indices are showing the result by again falling below their 50-day moving averages. That fall brings 200-day moving averages into play as key support. For the Dow Industrials, that support is currently at 17,000, for the S&P 500, 1960, and for the Nasdaq, 4460.
Our internal indicators reflect the bearish leanings of the indexes. The 200-day Moving Averages Index continues to be level 1 bearish, the Cumulative Volume Index has fallen to level 2 bearish, and the Advance/Decline Index to level 3 bearish. For reference, level 1 is the strongest reading, level 3 the weakest.
Only three of the nine major S&P sector funds are bullish, down from eight of nine a week ago. And as we mentioned, the most relevant market trend is the current uptrend in volatility. Thanks to three spikes since October, the underlying volatility trend has turned higher for the first time since late 2011. Once established, underlying volatility trends can last for several months and even years, so this is something to keep an eye on.
Treasury bonds (TLT) and the U.S. dollar (UUP) are benefiting from the rising volatility trend, thanks to their reputations as safe haven assets. TLT, in fact, has moved to record highs. While UUP has not reached similar heights, its current burst higher is similar to the one it made in mid-2008 during the global financial meltdown. While we are not suggesting a similar collapse is imminent, and we believe the current strength in safe haven assets is more a result of computer-driven momentum trading than a lurking major financial crisis, as with volatility, TLT and UUP are trends worth watching.
A strong dollar generally translates to weak commodities, and that continues to be the case, but only for economically sensitive commodities oil (USO) and copper (CU). Not coincidentally, gold (GLD), also perceived as a safe haven asset, is bucking the general commodity trend. A week ago GLD moved above its 50-day moving average, and it has continued that momentum by also moving back above its 200-day moving average. While GLD’s longer-term trend remains bearish, combined with the strong bullish tends in other safe haven assets, GLD‘s recent strength is something to monitor.
With major U.S. stock indexes falling into bearish tends and volatility increasing, options traders should move toward holding bearish positions. But the increasing volatility also continues to suggest that you take smaller positions than you normally do. In this environment, the majority of your options positions should serve as hedges, and only a small amount as speculations.
Despite that caveat, I never recommend sitting on the sidelines and constantly have money at work. Here’s a new put options trade on a stock that my analysis says will make an extreme move.
On Jan. 9, engine maker Briggs & Stratton Corporation (NYSE:BGG) made several bearish moving average crosses on several different timeframes. The price crossed the long-term 200-week moving average, the intermediate-term 21-week moving average, and a triple short-term crossover on the four-day, nine-day and 18-day moving averages.
Now, this is not an earnings play, but Briggs & Stratton’s earnings release on Jan. 21 could be a potential catalyst to take the stock down. Given the technical set up and the fundamental event, I suggest the following:
Buy the BGG April 17.50 Puts 80 cents or lower.
BGG closed Thursday at $18.30. After entry, take profits if BGG price hits $17.00 or the option price hits $1.40. Exit if BGG closes above $19.00.
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