Stocks continue to rally, but the current rally is getting somewhat long in the tooth.
Our index indicators continue to give bullish readings, as stocks continue to draw in investment funds that really have nowhere else to go. This has led to the indexes being technically overbought, and as we exit the generally bullish first week of a new month, we may see the indexes try to correct that overbought condition. If that becomes the case, then 50-day moving average support could come into play. For the Dow Industrials, that support currently is at 17,840; for the S&P 500, 2,070; and for the Nasdaq, 4,820.
Our internal indicators are confirming the bullish action of the indexes, although some slippage has occurred, with the 200-day Moving Averages Index moving back to a level 3 bullish reading from last week‘s level 2. The Cumulative Volume Index and Advance/Decline Index remain level 1 bullish. Seven of the nine major S&P sector funds are level 1 bullish, unchanged from a week ago. Of note, the Utilities SPDR ETF (XLU) has suffered nearly a 10% pullback and is currently trading at its 200-day moving average. If that support fails, it could be an early warning sign for the market in general.
Treasury bonds (TLT) have resumed their recent downward drift, as TLT has fallen back below its 50-day moving average. For the time being, the current weakness should be considered merely a consolidation from the strength seen over the past year in TLT. But a persistent downtrend could be a sign that Fed action toward raising interest rates is beginning to enter the market’s psyche. The U.S. dollar (UUP) supports the idea of weakness in TLT being only temporary, as UUP has broken out from a trading range that had been building over the past six weeks.
Following what appears to have been a temporary rally, commodities look like they are beginning to turn lower again. This is not surprising, given the uneven nature of current economic readings. Weakness in commodities would also signal that the current weakness in TLT is only temporary. Of the key commodities, gold (GLD) has plunged back into a primary bearish trend, and oil (USO) remains in the same downtrend it lapsed into several months ago.
With the rally in major stock indexes beginning to look stretched, options traders should begin to weight more evenly between bullish and bearish positions. As such, today’s recommendation is for a put option.
Buy the Kellogg Company (K) June 60 Puts (K 150619P00060000) at $1.30 or lower. After entry, take profits if K stock hits $60.50 or the option price hits $2.50. Exit if the stock price closes above $65.50.
Note: This is a relatively thinly-traded option chain, so you may need to be patient to get established at my recommended entry. Avoid buying a large number of contracts at once to prevent wild price swings; instead, enter your orders in smaller lots of five or 10 contracts.
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