Dear Fellow Trader:
Although stocks gave up some of their recent gains on Thursday, my indicators are giving bullish readings for the second week in a row. Traders may be somewhat nervous about holding positions into the extended Labor Day weekend, but we are getting ready to enter a new month, the first few days of which are usually bullish as new capital gets put to work by professional traders. However, I’m still anticipating a pullback during the historically bearish month of September, so I will likely become much more defensive after the first week of the new month has passed.
The major U.S. indices — with the exception of the Dow Jones — all reached new highs this week, but those gains are masking some of the issues in the broader global markets. International markets are not looking good right now, especially currency markets. The Turkish Lira, the Argentine Peso and the Indian Rupee, among others, are at or near all-time lows and have been falling like rocks lately against the U.S. Dollar.
That tells me that capital from around the world is still flowing into the United States, which is one of the big factors behind the rally in U.S. stocks. With the Federal Reserve planning to continue increasing interest rates going forward, that makes the U.S. Dollar much more attractive from a global perspective, but that could also cause problems in the future.
As I’ve mentioned before, the amount of debt in the world economy is equal to approximately 225% of world gross domestic product, which is ridiculous. Eventually, we’re going to see economies across the globe start to deleverage, and that’s likely not going to be a smooth process. The “debt bomb” is still my biggest concern, and it’s an important issue I think all investors should be aware of.
On the bright side, this has been the best August for stock market returns since 2014, but the rally over the past week was based on very low volume. That tells me that there may be less conviction in this move and, as many professional traders come back to work next week after the long weekend, markets could be brought back to reality.
The technology and health care sectors have been leading stocks higher during the latest move, but they are now highly overbought based on the indicators I’m watching. That doesn’t mean that they’ll stop going up, but it’s probably best to wait for a pullback before jumping into the market with new capital at this point.
This week’s rally has also been based on some positive trade news regarding a potential deal between the U.S. and Mexico, and I think Canada will want to strike a deal with the U.S. as well. China, however, is not playing along, and getting that country to agree to a deal is not going to be easy. I think it would be much better for the whole world if the two countries were able to come to an agreement on trade, but that doesn’t seem to be in the cards right now.
Chinese markets turned down this week after a mild rebound last week, and that could start to spill over into the U.S. if the declines become more severe. Turmoil in all international markets could start to affect the U.S. as well, although the S&P 500 should have strong support at its prior highs set back in January on any pullback. However, a drop back below the 2,875 level would be worrisome.
I’m not seeing any signs of an imminent correction at this point, though, as the S&P 500 Volatility Index (VIX) is still very low at current levels around 13.50. This is one of the indicators I pay close attention to in order to spot potential corrections, but I won’t get too worried until the VIX crosses above the 17 level.
While I am going to remain cautious as we head into September, I do think that investors should stay involved in the stock market. To find the best names, I recommend focusing on stocks that are undervalued in an overvalued market, have quality products and strong balance sheets as well as limited risk to the downside. That’s not an easy task in this market, but following those three rules should help you build and maintain a stronger overall portfolio.
Please note that U.S. markets will be closed all day this coming Monday, Sept. 3, for Labor Day.This means that you will have today, next Tuesday and next Wednesday to get positioned in the new trades listed below. If any of the positions go unfilled by next Wednesday’s close, we will plan to cancel those orders ahead of Thursday’s opening bell.
This Week’s Trades
Every week, I scan thousands of potential option plays to develop your exclusive list of Power Options. These Power Options rely on a proprietary, scientific approach that removes the guesswork and allows my powerful software to identify the best option buys.
All of these short-term options are actionable for up to three days after they are recommended. You’ll need to watch the stock and option prices to ensure the trades are close to where they were when I made the recommendation. If after three days you still have not gotten the position filled, cancel the order and watch for my new recommendations, as the profit probabilities may no longer be valid.
Buy to open the PVH Corp. (PVH) Oct 155 Calls (PVH181019C00155000) at $1.25 or lower. After entry, take profits if the stock price hits $151.80 or the option price hits $4.30. Exit if the stock price closes below $136.50.
Buy to open the CenturyLink, Inc. (CTL) Oct 22 Calls (CTL181019C00022000) at $0.72 or lower. After entry, take profits if the stock price hits $23.20 or the option price hits $1.60. Exit if the stock price closes below $20.80.
Buy to open the Pandora Media, Inc. (P) Oct 9 Calls (P181019C00009000) at $0.90 or lower. After entry, take profits if the stock price hits $10.60 or the option price hits $1.90. Exit if the stock price closes below $8.40.
Buy to open the Hain Celestial Group, Inc. (HAIN) Oct 27 Puts (HAIN181019P00027000) at $0.70 or lower. After entry, take profits if the stock price hits $26.30 or the option price hits $1.60. Exit if the stock price closes above $29.40.
Buy to open the NCI Building Systems, Inc. (NCS) Oct 15 Puts (NCS181019P00015000) at $0.35 or lower. After entry, take profits if the stock price hits $15.30 or the option price hits $0.90. Exit if the stock price closes above $18.10.
Remember, if a profit target is hit intra-day, exit and take profits immediately. Occasionally, if a sudden profit appears, we may recommend exiting a position early to capture the gains, and my team will alert you during the trading day via email or text message if you have elected to receive them.
If the underlying shares violate the stock-based sell signal price at the close of trading, exit the option trade the next morning at the open.
Additionally, if an option or its underlying stock does not hit its target, or if the stock does not violate 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.
As always, we’ll let you know when there’s a profit-taking opportunity, and we’ll be back with a look at all of our positions on Wednesday. Have a great weekend.
Ken Trester and the Power Options Weekly Team
Important Note: This sample issue was originally published several months ago. All of the trade recommendations are now out-of-date and no longer apply. When you're ready to get into the next trades simply click the button below.
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