With the major recovery rally in the market, the question is once again the same. What’s next?
For the bull, the market seems to be indicating that every dip, no matter if it seems scary, is still a buying opportunity. For the bear, this is an overdone recovery while the reasons for the previous sell-off still exist. And perhaps a key piece of information will help define the winner of that argument later today – the minutes from the July FOMC meeting.
When we get a move in response to an FOMC meeting and the non-farms payroll and the moves in interest rates that ensued, I tend to think these minutes will be crucial to the market. So, the best thing I can do is prepare a few ideas for the bullish case and a few ideas for the bearish case.
But first, what’s my signal of bullish or bearish? Obviously, the stock market overall is a big indicator, but I also like looking at the 10-year treasury yield:
If the yield breaks below 3.8%, it starts to show similar signs of liquidation that occurred when the market was pressing lows in early August. That’s a bad sign. If it can get back above 4%, it feels like the market will be stabilizing and there’s less fear over uncertainty in bond yields to drive a potential market liquidation. Anything in between, and I’m still going to have to remain cautious until I see something else that can increase my confidence in a market direction move.
And with that, once I see some confidence in interest rates and the broad market, I’d like to be able to quickly pull up a few stocks that may benefit from a bull or bear market. One such idea on my watch list is going to be International Paper, stock symbol IP:
IP is trading near highs, and if it makes a new high above $47.78, that’s a great sign for this bullish stock that has cheap implied volatility, and thus cheap options leverage. Add into that the defined risk and the technical breakout setup and I’ve got a high expected value leveraged trade idea right off the bat. And that’s why IP is one of the many names on my Outlier Watch List right now.
If you’d like to get a list of ideas and setups just like this that could be of interest for trading opportunities, take a look at my Outlier Watch List.
And as always, please go to http://optionhotline.com to review how I traditionally apply technical signals, volatility analysis, and probability analysis to my options trades. And if you have any questions, never hesitate to reach out.
Keith Harwood
Keith@optionhotline.com
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