My indicators are still bullish, but the stock market remains extremely overbought, and I believe the odds of this market rising are much lower than the odds that it will fall. So, I still have a bearish stance at this point in time.
The stock market is in a position where there’s a huge amount of overheard resistance, and we’ve seen a real distribution pattern over the course of the last year. First, it was seven months within a very tight trading range, and then the big collapse in August 2015, followed by a rebound and another collapse. And, now, we’re back up against that wall of overhead resistance, and I just don’t think the odds are very good that it’s going to rise from here.
A lot of stocks are in bear markets and, with an eye on my indicators, I believe the equity markets should continue to roll over. Again, I would say that the odds favor the bears at this point and that we should expect the market to fall further from here.
The one thing I will say is that this rally, which has been strong and very steep, is very, very typical of a bear market. It has moved very sharply and much higher than many thought possible, and I think this is where we should be very careful because this is simply very characteristic of a bear-market rally.
And several market leaders — such as the FANG stocks of Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOG) — are not doing very well. They’re actually starting to pull back in the face of some selling pressure and, based on that fact, I’d continue to maintain a bearish stance. The small-caps are not doing well, either. In fact, this part of the market is starting to fall further than other stock market-capitalization segments.
We could also look into changes made in the level of sideline cash that’s sitting in mutual funds. If there’s a lot of cash there, fund managers are going to be more likely to deploy it into the market. But I think what really happened is that the market simply became oversold to start the year, especially when you look at many of the energy stocks that were so cheap that we ended up with a huge short-covering rally, which I think has run its course.
If the market breaks above current levels, then I might be inclined to change my opinion, but it’s got to be a decisive price break above historically respected resistance and, right now, I don’t think that’s going to happen. If I am proven to be wrong, the stock market will need to make a pretty convincing move, possibly up to a new high. If that happens then, of course, I would turn bullish.
But for now I continue to look for bearish opportunities, and one area offering a plethora is emerging markets. In particular, Brazil’s market has mirrored the U.S. stock market in that it has gone up a long way very quickly…too sharply, if you look at the chart. Brazil is also dependent upon the commodities, and they have not performed well.
There’s a short-term opportunity to take advantage with put options in the iShares MSCI Brazil ETF (EWZ).
Specifically, my recommendation is to buy to open the EWZ June 24 Puts (EWZ160617P00024000) at $1.50 or lower.
After entry, take profits if EWZ hits $23.20 or the option price hits $2.70. Exit if the EWZ closes above $27.40.
Now, I want to be clear that even though we are trading a put with a June expiration, this is actually a much shorter-term trade. My rule for our Power Options Weekly trade is that I want to be in and out of it within three weeks. My expectation is that there will be profits to take in that three-week span but if neither the target or stop loss are hit in that window, be sure to exit the trade at market levels by April 1.
InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. It’s the perfect ‘bridge’ between investing in ordinary stocks and the turbocharged world of options trading.
Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990. To receive further updates on this trade as well as an alert when it’s time to take profits, try Power Options Weekly today and receive 2 weeks for the price of 1 for only $19.95.