Our index indicators are giving bullish readings — but the current bullish readings hardly tell the whole story. This has not been the steady, low-volatility market rally that has been the recent norm. Instead, the indexes darted below their 50-day moving averages early this week, then reversed course and rallied back above them over the past couple days. This kind of volatility is not to be taken lightly, as it indicates that sudden and sharp reversals can happen at any time. But for the time being, the indexes are back to bullish, and will remain so with the Dow staying above 17,590, the S&P 500 above 2,035, and the Nasdaq above 4,675.
Our internal indicators also remain mostly bullish. The 200-day Moving Averages Index remains level 3 bullish, but is on the brink of improving to a level 2 reading, while the Advance/Decline Index and Cumulative Volume Index are level 1 bullish. Eight of the nine major S&P sector funds are bullish, a one-fund improvement from a week ago. The most noteworthy development is seen in volatility charts, which have been establishing a longer-term rising trend for the past several months. We mentioned on Monday that increasing volatility is likely to be a hallmark of the coming year, and volatility charts are confirming that.
Treasury bonds (TLT) and the dollar (UUP) continue to benefit from the increasing volatility. The dollar especially continues to point out that current market strength is basically centered on U.S. assets, as every foreign currency remains deeply bearish against it. And though TLT has pulled back slightly over the past couple days, it remains within striking distance of its all-time high.
A strong dollar generally translates to weak commodities, and that continues to be the case, especially with economically sensitive commodities oil (USO) and copper (CU). USO continues to trade at all-time lows, and it is joined in those depths by the PowerShares DB Commodity Index Tracking Fund (DBC).
One commodity bucking the current trend is gold (GLD), which has scratched its way back above its 50-day moving average. But GLD’s longer-term trend remains bearish. What’s more, current short-term strength in GLD can easily be interpreted as traders seeking a hedge against whatever troubles might be looming throughout the world, and potential trouble spots certainly abound.
With major U.S. stock indexes crossing back and forth between bullish and bearish, and other signs pointing to continuing uncertainty, options traders should continue to strike a balance between bullish and bearish positions. Here’s a strong trade on the bullish side, in the “safety trade” sector of consumer staples.
Buy the Clorox Co (CLX) Apr 115 Call options at $1.60 or lower (CLX closed Thursday at $107.31). After entry, take profits if the stock price hits $111.60 or the option price hits $3.00. Exit if the stock price closes below $105.20.
Note: With volatility increasing, I recommend that you continue to use caution by taking smaller positions than you normally would. Some would argue that high volatility is a good time to own options. That is indeed the case — but as hedges, not as speculations, as increasing volatility is likely to take you out of a position early, just as it does with stocks.
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