My indicators are now turning negative. In fact, they’re giving sell signals, and I’m starting to add downside insurance plays to my portfolio.
As I anticipated, this very narrow rally seems to be, at least temporarily, over. My expectation is that the market will turn down for the next two weeks until the U.S. Thanksgiving holiday, but we could see another spike higher after that.
As far as interest rates go, it now sounds to me like the Fed will increase rates, but I would suggest that that would be the last increase for a while. My premise continues to be that we have such a huge debt in the United States that an interest rate increase of any kind would be detrimental. Not to mention that the Fed is quite liberal, especially heading into an election year.
During the most recent Republican presidential debate, I feel that they didn’t spend enough time talking about the debt and instead focused on spending money. Make no mistake: The U.S. is bankrupt, and spending money in the midst of bankruptcy and such a huge amount of debt is a difficult proposition.
It’s possible that the Fed might raise rates only to lower them again. Normally, facing this kind of situation, I would say that the Fed wouldn’t increase rates, but I think they’ll cave under the political weight to do something. I know the central bank doesn’t want to, but higher rates seem to be a foregone conclusion, as interest-rate-sensitive stocks are falling and the U.S. dollar is strengthening.
Commodities continue to be in a downtrend, with oil trading below $44 this week, now bumping along the bottom of its range. I do believe oil is making a bottom, but the evidence still indicates that there’s too much oil and not enough demand. Thus, I don’t expect oil to move up a lot in the next three to six months. There is, however, the potential for oil to move lower, and if it breaks down below $40, it could drop sharply from there.
We’re at a point at which it’s smart to include some positions that will profit if things fall apart, as the near-term picture looks grim. As such, today I’m recommending a bearish option play.
Buy to open the United States Steel Corporation (X) Jan. 15th (2016) 9 Puts (X160115P00009000) at $1.35 or lower. After entry, take profits if the stock price hits $8.10 or the option price hits $2.00. Exit if the stock price closes above $10.50.
If after three days you still have not gotten the position filled, cancel the order and watch for new recommendations, as the profit probabilities may no longer be valid.
Additionally, if the option or its underlying stock does not hit its target, or if the stock does not close at or below its sell signal price within three weeks of entry, close the position. I do not recommend holding an option play for more than three weeks.
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