Rally: For real, or a “set-up”?
Following last week’s rally, the trend analysis for the major indices is now mixed to slightly positive – consistent with the possible beginning of a new intermediate-term up-trend. Unfortunately, it’s also consistent with what we’d expect to see from a “set-up” rally just before another leg down (a potential “third wave“) in an intermediate- or longer-term down trend.
Ultimately, time and magnitude will determine whether this rally is for real or not. If it’s a “set up,” then it probably 1.) won’t last for more than another two or three weeks (if that long), and 2.) won’t be able to get through upper resistance levels (of about 1300 on the S&P 500 and 11400-11500 on the DJIA).
Most indices and many individual stocks have rallied from intermediate-term oversold conditions and certainly have room to go higher before becoming similarly overbought. If the current rally is in fact a “bull trap,” then a further move higher would help serve the purpose of convincing a majority of market participants to become bullish, at just the wrong time of course – another warning sign to watch for in the sentiment indicators.
New positions
Dow Chemical (DOW) – Last Thursday I sold some August 35 puts on DOW after the stock fell over 10% on a disappointing earnings report:
The stock price has been falling since early last year after reaching a high of about 56, and I’ve been waiting for a good “low-risk” put-selling opportunity. I may also sell some August 30 puts if DOW falls to the 30-31 level in the near term. Meanwhile, I’m encouraged by all of the analysts who have decided to downgrade the stock now that it has fallen about 40%. 
Molson Coors Brewing (TAP) – TAP has been moving up recently and on Friday I sold some August 70 calls against my long position in the stock:
It does look like it has higher to go, but it has also reached short-term “overbought” conditions on the indicators I follow. This indicates strength, but can also mean a short-term peak. If the stock is called next month I’ll have made a nice profit; if not, I’ll have significantly lowered my net cost in the position.
Fresh Del Monte (FDP) – On Tuesday I sold my shares of FDP for a very small two-month net profit of about 0.5%:
The chart doesn’t look bad (from a potential bottoming perspective), but with the stock paying only a 1% dividend I decided I’d rather free up some capital and look for opportunities elsewhere.
KB Home (KBH) – On Tuesday I sold my shares of KBH (which I had been put the previous week) as it rallied to the 41 level:
I almost sold some August calls, but felt the stock might still have further to drop in the near or intermediate term and decided to use this rally as an opportunity to exit the position – way too early as it turned out. Still, I’m not complaining about the 7-day net return of 4%+.
Watchlist
Utilities (e.g., Centerpoint Energy (CNP)), energy (e.g., Chevron (CVX)), big pharma (e.g., Merck (MRK)), telecoms (e.g., AT&T (T)), healthcare (e.g., Universal Health Services (UHS), and food/beverage stocks (e.g., PepsiCo (PEP) and Anheuser-Busch (BUD)) were the standouts in this week’s “upside strength” scans.
New “oversold” stocks of interest include 3M Co. (MMM), Aetna (AET), Black & Decker (BDK), CSX Corp. (CSX), Eagle Materials (EXP), Florida Rock Industries (FRK), Nam Tai Electronics (NTE), Pentair (PNR), Polaris Industries (PII), and United Parcel Service (UPS). I’ll be looking to sell puts on many of these – and other “oversold” candidates I’ve mentioned in recent weeks – on further declines.
