Dear Fellow Trader:
My indicators are flashing sell signals this week, a downgrade from last week’s bullish readings, as the market has really rolled over during the last few trading sessions.
From a technical perspective, the Russell 2000 small-cap index has made a “double-top” formation after being rejected from its prior highs, which is a bearish sign, and the tech-heavy Nasdaq has now dropped below support and is trading under its 50-day moving average once again.
The S&P 500 has not been acting well for a while now, as it failed to make new highs on its latest rebound, and it dropped along with the other major indices this week. Therefore, with my proprietary indicators and the technical picture both pointing to the downside, I am now in the bearish camp and I suggest being much more defensive with your portfolios at this time.
The bond market is now oversold, in my view, and with bond rates flattening out a bit recently, I think we could actually see a rally in Treasury bonds from current levels. However, the fact that there is a lot more money going into Treasuries is a bearish sign, as it means that market participants are becoming much more cautious.
I think what’s going to happen is that, as Treasury yields come down, interest-rate sensitive issues like REITs, utilities and other dividend-paying stocks are probably going to see a little rally and could fare better in this type of environment over the next month or so as their yields become more attractive to investors.
I would expect to see at least a bit of a bounce in the dividend-payers, but, once again, seeing money flow into Treasuries is not a good sign for the overall market, as it shows that investors are seeking protection from uncertainty.
Switching gears, I want to revisit the topic of tariffs again this week, as they have broad implications for the stock market. The United States has been running a trade deficit for decades, which just tells me that they are not very meaningful. We’ve had a very robust economy for years and years even with growing trade deficits all along the way, so the argument being made by President Donald Trump and the current administration does not hold up in my opinion.
I generally believe that tariffs are ridiculous, as they interfere with the laws of supply and demand. The open market should determine what goods are bought and sold and in what quantities, not governments. Now, this does not mean that government deficits are good. In fact, as I’ve mentioned before, the amount of consumer, corporate and government debt is a huge problem. But, again, I’m not nearly as worried about the U.S. trade deficit.
A better way to boost the U.S. steel and aluminum industries, for example, would be for the government to provide subsidies to those industries like other countries do now. I think this would be a much wiser move than getting into a trade “fist-fight” with China. In general, as soon as the laws of supply and demand are disrupted, things start to go downhill.
The last topic I want to cover today is the situation with Facebook (FB). I’ve heard a lot of people say that FB is a monopoly and that it should be regulated and treated like a utility, but I think that is a very bad idea. Whenever regulations are implemented, they almost always help the big corporations and hurt the small corporations that do not have the staff necessary to comply with those new rules.
So, it’s no wonder why Facebook CEO Mark Zuckerberg said he would embrace some regulation on his company, as it would ultimately help him and hurt his competitors. The U.S. government is already talking about this, and if it does implement some kind of regulation, it would turn FB into more of a monopoly than it already is.
Beyond that, the stock has been a main focus point for the market over the past week, but I don’t think it’s going to go much lower. While it could drop as low as $160 per share, in my view, I don’t think it will fall a lot further below that level, as FB is still the premier social-media company.
We are in a corrective phase for the market, however, and it is still possible that we could test the February lows now that the rebound in the major indices has stalled. With that in mind, I’m recommending two new call options and three new put options today to help balance out our current portfolio.
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 NextEra Energy, Inc. (NEE) May 170 Calls (NEE180518C00170000) at $1.45 or lower. After entry, take profits if the stock price hits $168.30 or the option price hits $3.60. Exit if the stock price closes below $158.60.
Buy to open the Intel Corporation (INTC) May 55 Calls (INTC180518C00055000) at $1.10 or lower. After entry, take profits if the stock price hits $54.50 or the option price hits $2.70. Exit if the stock price closes below $49.00.
Buy to open the Mallinckrodt Public Limited Company (MNK) May 12.50 Puts (MNK180518P00012500) at $0.95 or lower. After entry, take profits if the stock price hits $12.00 or the option price hits $1.70. Exit if the stock price closes above $15.40.
Buy to open the Dave & Buster’s Entertainment, Inc. (PLAY) May 40 Puts (PLAY180518P00040000) at $1.80 or lower. After entry, take profits if the stock price hits $38.10 or the option price hits $3.60. Exit if the stock price closes above $44.50.
Buy to open the TrueCar, Inc. (TRUE) May 9 Puts (TRUE180518P00009000) at $0.65 or lower. After entry, take profits if the stock price hits $8.20 or the option price hits $1.30. Exit if the stock price closes above $10.60.
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 position closes below the stock-based sell signal price, exit the 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 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.
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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