Stocks rebounded Thursday from Wednesday’s sell-off, continuing their months-long rally for at least another day. But things just don’t feel as positive as they did a few weeks ago.
Among our internal indicators, the 200-day Moving Averages Index is the most worrisome, as it has fallen to its own 200-day moving average. The worrisome aspect is that the weakness has been ongoing since January, even as stocks in general have moved higher. The 200-day Moving Averages Index has been out in front of some serious sell-offs in the past, so we will be watching this current development closely. Meanwhile, the Advance/Decline Index and Cumulative Volume Index remain bullish.
Other underlying indicators flashing caution signs include the Dow Jones Transportation Average, which has fallen to its 50-day moving average. A break below that average would raise warning flags for followers of classic Dow Theory. Also, a pair of S&P sector funds have fallen below their 50-day moving averages, and two others look like they are about to. The two below are Energy and Materials, and the two almost there are Industrial and Technology. All of these funds can be classified as cyclical indicators, and their weakness is a sign that the global economy is facing some renewed doubts.
These doubts are also reflected by strength in the U.S. dollar and U.S. Treasuries. In fact, the most pronounced trend change over the past week has been that of the 20+Yr. Treasury Bond ETF (NYSE:TLT), which has at least temporarily broken its “lower highs, lower lows” trading pattern and has even moved back above its 200-day moving average. Higher Treasury prices of course signal lower interest rates, which would be good for the economy. But the surge in strength could also be reflecting a temporary flight from problems elsewhere in the world, so this trend has a ways to go before it can be considered established.
With internal and underlying trend indicators showing some weakness, and also with news headlines being less than positive, options buyers should step up their put buying, even with our main indicators still being bullish. Bulls still have the Fed in their camp, but accommodating monetary policy can only carry things so far. Eventually the economy, corporate profits and even world affairs have to get on board, and right now there are questions about all three.
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Helmerick & Payne (NYSE:HP) is an oil and gas driller. The stock topped out in February and then began pulling back. It has now fallen below its 50-day moving average and looks like it will continue heading lower, especially if commodity stocks continue to come under pressure. Here is the best way to play more weakness in Helmerich & Payne:
Buy the Helmerich & Payne June 52.5 Put (HP130622P00052500) at a suggested price of $1.10 ($110 per contract).
After taking the position, enter a good-til-cancelled contingent order to sell this option if the stock hits its target price of $53.80. That should give you an option price of about $2.70, for a 145% profit.
Close this position and cut losses if the stock closes above $61.90, when the option price should be about 70 cents. The stock is currently trading at $59.21. The computer-simulated probability of this option hitting its target price is 15%.
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