My indicators remain neutral to negative, unchanged from recent weeks. Market breadth has also been weak, as the number of stocks posting declines is far out-pacing those that are advancing. While this suggests internal weakness within the market, it is not necessarily being reflected in the major averages, as heavily-weighted stocks making large price moves can skew the indices so that they appear more bullish than they might otherwise seem.
There are also several worrisome signals that I’m watching closely. One of the key harbingers for the market remains the Dow Jones Transportation Index (DJT) and, although it has snapped back from its late-May lows, the transports are still stuck in a broader, longer-term decline.
Also, U.S. stock valuations are very high and, coupled with the heightened merger and acquisition (M&A) activity we’ve seen lately, I’m inclined to think that we’re nearing a market top. We see M&A activity pick up when stock prices are very high because one company can use the elevated value of its own stock, rather than cash, to acquire another company. In general, it’s not a good sign for investors.
Another noteworthy warning sign is that the track record of success among recent initial public offerings (IPOs) has not been good. In other words, the number of new issues declining after coming public has been higher than those seeing a boost right out of the gate. Another warning signal is that interest rates are rising, which tends to mean stocks will fall.
In general, U.S. stocks are overpriced, as the S&P 500’s price/earnings ratio is sitting near the high end of its historical range. Although the broader energy and financial sectors are offering some fairly priced assets, biotechs are overvalued, and tech is getting a little heady, too.
However, global markets continue to offer value, particularly European stocks and some Asian stocks. With the U.S. dollar as high as it is, it’s a good time to enter those markets because you’ll get more value for your asset purchases — with one caveat: The only area I would avoid is China and related stocks. While my expectation is that the Chinese market will go down over the long term, it’s known to be a fraudulent market prone to over-hype and manipulation, so I wouldn’t go short or long China right now.
The bottom line is that the market is still in a very narrow trading range. I expect we’re going to stay in that range for a while before the averages ultimately make an explosive move, but the direction of that move still remains in question. While I’m staying nimble with a mix of bullish and bearish plays, things are skewed a bit more bearishly, so I have a new put option for you today.
As I mentioned earlier, the U.S. market is not the belle of the ball at the moment. I’ve found an iconic American stock with weak short-term technicals. Alcoa (AA) has been in a downtrend since May 1, and that looks to continue.
Buy the AA Aug 13 Puts at 90 cents or lower.
After entry, take profits if AA stock hits $11.60 or the option price hits $1.50. Exit if Alcoa closes above $13.00.
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