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It’s a Bullish Market…Until it Isn’t

For now, sprinkle in puts, but mostly trade calls


Our indicators are giving bullish readings, as they have since the start of the year. This past week built on the prior week, during which the indexes recovered from a major one-day sell-off. The most recent week has seen a more orderly advance. As most investors know by now, the Dow is trading at an all-time high. And just as important, the S&P and Nasdaq are lending support to the Dow’s move by breaking above the short-term resistance we mentioned in last week’s comments.

 Indicators to Watch

Our internal indicators are also supporting the Dow’s move. All nine major S&P sector funds are bullish, as are the 200-day Moving Averages Index, Advance/Decline Index and Cumulative Volume Index. But the 200-day Moving Averages Index continues to wrestle with its own 50-day moving average. This could simply be a sign that some stocks are resting before they rejoin the indexes in their moves higher, but it could also be a sign that fewer and fewer stocks are contributing to the advance. This is an indicator that bears continued watching.

As would be expected, the Dow’s surge to new highs has been accompanied by weakness in safe haven assets, in particular U.S. Treasuries. Following a nice little rally during the last week of February, the 20+ Year Treasury Bond ETF (NYSE:TLT) has reversed course and is again testing support at $116. A definitive break below $116 would set the stage for a sharp move to the $111 area. Such a move would of course lift long-term interest rates. Whether the selling in Treasuries is due to traders raising money to buy stocks, or to better economic numbers, isn’t really the concern. The idea that long-term interest rates are slowly working their way higher is.

Central Banks Still Pedal to the Metal

Be that as it may, the current environment is still all about the Fed. As long as central bankers continue their current policies, stocks should continue to benefit. But one has to wonder, what is going to happen when even the hint of policy tightening comes about? The ongoing volatility in Treasury bonds is already one indication. We’ve stated many times that bonds are a bubble waiting to pop. But when that happens, would stocks be far behind? And could the economy withstand major sell-offs in either market? It is quite an unpleasant corner central bankers are painting themselves into. We could be at a point at which reversing current monetary policy is almost unthinkable, ever.

But for now, with central banks continuing to press the pedal to the metal, options buyers should continue to buy calls. Markets are bullish until they aren’t, and with the indexes breaking to new all-time highs, new money should continue to pour in for at least the next couple months. But also continue to sprinkle puts into your portfolio, “just in case.”

Article printed from InvestorPlace Media,

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