Our index indicators are giving bullish readings, unchanged from a week ago, as volatility in both directions continues to abate and the TLT perked up. While the current rally has led the indices into overbought territory, we are also entering the first week of a new month, so the odds favor the uptrend continuing. But if the overbought condition leads to some short-term profit taking, 50-day moving average support levels could come into play. For the Dow Industrials, that support currently resides at 17,775, for the S&P 500, 2060, and for the Nasdaq, 4780.
Our internal indicators continue to confirm the bullish action of the indices, and have actually improved slightly, with the 200-day Moving Averages Index moving up to level 2 bullish. The Cumulative Volume Index and Advance/Decline Index remain level 1 bullish. Level 1 is the strongest reading, level 3 the weakest. Seven of the nine major S&P sector funds are level 1 bullish, unchanged from a week ago. And volatility indices continue to decline.
In a change from their steady decline during the past few weeks, Treasury bonds (TLT) are trying to rebound and recover some of that lost ground. TLT had moved back above its 50-day moving average, but that was a temporary move and it continues to struggle to maintain momentum. The puzzle is that this decline has happened with U.S. economic reports showing less than stellar growth.
Generally, economic weakness is bullish for bonds. Perhaps the current economic weakness was priced in during TLT’s rally. Or, more likely, Treasury bonds have unhinged from the economy and are moving based on money moving in and out of a “safe haven” investment.
Commodities might also be contributing to the weakness in Treasuries. A key economic commodity, copper (CU), continues to improve and has moved back above its 50-day moving average. But conspicuously absent from the general commodity improvement is oil (USO), which continues to flounder, as does gold (GLD). Without rally participation from those two commodities, inflation concerns will remain absent from the minds of traders.
With the major stock indices retaining bullish readings and volatility indices moving lower, options traders should continue to lean toward bullish positions. Here’s one of my hand-picked recommendations:
Packaging manufacturer Crown Holdings (CCK) has been on a tear all month and looks to be gunning for a return to its all-time highs topping $58. With the stock currently trading around $53, if it continues climbing a few points against this bullish backdrop, near-term call options could easily over-react.
Buy to open the CCK April 55 Calls at 75 cents or less. After entry, take profits if CCK stock hits $55.50 or the call option hits $1.90. Exit if CCK shares close below $51.40.
While signs are pointing continued bullish trading, as always, maintain some bearish positions in your portfolio “just in case.”
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