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Both the S&P 500 and the Dow Jones set new all-time highs yesterday, and the S&P 500 Volatility Index (VIX) closed below the 12 level at 11.80, which is a positive sign. That tells me that traders are feeling comfortable at current levels and that the chances of a sharp pullback in the near future are minimal.
While the Russell 2000 and the Nasdaq both made strong gains yesterday, they are still down slightly from their recent highs, so it looks like there may be a rotation from higher-risk tech and small-cap stocks to more defensive names currently underway.
That makes sense, as the Russell and the Nasdaq had previously been the market leaders, and it now appears that traders are starting to shift the profits they earned in those riskier names to more stable stocks in the S&P and the Dow.
The other story that was somewhat buried in the news is that the yield on the 10-year Treasury note rose to a high of 3.1% this week. I’ve previously said that a 10-year yield above 3% would be a negative for stocks, and I still think it will be eventually, but right now I believe it’s simply a reflection of the strength of the U.S. economy.
It’s probably more bullish for the market than many investors think, but we are still facing the “debt bomb” of consumer, corporate and government debt, and the general rise in interest rates is going to make it harder to pay that debt down. That’s the biggest problem on the horizon right now, but it’s very hard to say when that problem will spread to the stock market.
For now, then, I am recommending a bullish trade today on Etsy, Inc. (NASDAQ:ETSY), which is still in a very strong uptrend, to play the current rally in stocks.
Buy to open the Etsy, Inc. (ETSY) Oct 50 Calls (ETSY181019C00050000) at $2.15 or lower.
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InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. 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.