Consider Dow Jones Puts on Shaky Market Prospects
The major stock market averages were down sharply last week, and I think the optimism seen earlier this month for a recovery may be premature. Problems are resurfacing, and I’m recommending buying puts on the Dow Jones Industrial Average.
I recommend buying the June 12400 put, which expires on June 19. Currently, it’s running about 200 points, for a cost of $1,000, not excluding your commission charges. My objective is for the market to break to 12,000, and stabilize around 11,700. Technically, the market is looking weak. Momentum indicators, the Relative Strength Index (RSI) and stochastics, are turning down. We’ve seen a wedge pattern over the past three months that indicates a another wave lower after two thrusts down in January and mid-March. The market was unable to sustain a rally above the 200-day moving average, so I’m not that bullish on near-term prospects.
From a fundamental standpoint, we’ve had last year’s subprime issues still creating fallout in the financial sector and economy at large. On Monday, UBS warned of possible record losses on non-U.S. real estate, and saw economic and market conditions as volatile and challenging in the second quarter. This morning, the S&P/Case-Shiller home-price indexes reported a 14 percent drop in the first quarter from last year, the largest drop in the history of the indexes.
Corporate earnings prospects are dimming, and material costs are rising. Crude oil continues to set records, with NYMEX futures trading up above $135 a barrel last week. The CBOE Market Volatility Index, (VIX), which is seen as a gage of trepidation by investors, has formed a double bottom and seems to be heading up. It’s up about 6 percent in early trade. The VIX represents market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The VIX has been considered to barometer of investor sentiment, indicating investor confidence seems to be waning and more volatile conditions may be ahead.
Of course there are other strategies you can consider, give me a call and I’d be happy to tailor a strategy to your specific goals and risk-tolerance. Ask about our special 50 percent off commission offer for new clients too.
Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.
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