Look For A Gradual Market Rally Into Year End – Use This Options Strategy Now

Posted 9:30 Am ET - In the daily chart of the S&P 500 you can see that tiny bodied candles are starting to pile up. Stocks are floating higher and they are fueled by seasonal strength. There are opposing market forces in play and my market bias remains neutral to slightly bullish. The economic data points this week have generally been good. Jobs were soft, but that was expected because of the recent Coronavirus spike. In my comments yesterday I outlined why I though the jobs report would be soft this morning and that forecast was correct. In November 245,000 jobs were created and 440,000 jobs were expected. ISM manufacturing and ISM services were solid this week. Hospitals are overwhelmed with new virus patients, but investors are focused on new vaccines and better days ahead. Yesterday, Pfizer announced that it will only be able to deliver half of its 100 million doses this year. It is dealing with logistical problems since the vaccine has to be kept at -70°C. Moderna plans to distribute 125 million doses of its vaccine early next year. AstraZeneca is producing over a billion doses and its vaccine can be refrigerated. Johnson & Johnson Eli Lilly and others are also working on vaccines and they are in phase 3 clinical trials. Late in Q1 analysts are expecting an economic recovery driven by pent-up demand. It will take time for profits to catch up to current valuations and the S&P 500 is trading at a lofty P/E of 40. Fantastic news is built-in and any snag (like the Pfizer news yesterday) will spark selling. As long as the market does not spike higher, the risk of a big drop is minimal. Massive gaps higher like we saw on November 9th will prompt profit-taking. Politicians are discussing a stimulus bill, but there is no progress. Perhaps the weak jobs report today will motivate them. The bipartisan $900 billion plan proposed this week was shot down. England is only a few weeks away from its EU departure. Both sides are in disagreement and a hard exit is possible. EU members are also in conflict and Poland and Hungary are not agreeing to the terms in the €2 trillion stimulus package. Stretched market valuations mean that this rally will unfold gradually and we can expect pullbacks. Bond yields are at historic lows and stocks are still attractive on a relative basis for investors who are willing to ride out this storm. I believe that we will see SPY $360 tested in the next few weeks. Swing traders are long a half position of SPY at $360 and we will hold without a stop. Place a target at SPY $370. The best strategy right now is to sell out of the money bullish put spreads on strong stocks with relative strength, heavy volume and technical breakouts. Sell the bullish put spreads below technical support and focus on options that expire in three weeks or less. We want time decay working in our favor and this is the perfect market for this strategy. We currently have seven open positions and they are in great shape. Last week we had three positions max out. This is a great way to generate income while the market gradually floats higher. Day traders don't have to worry too much about the rug being pulled out from under them. Expect a doji day where the close is close to the open (tiny bodied candle). Look for stocks that have heavy volume and that are above the prior day's high. Technical breakouts on a daily chart and relative strength are also important. As long as the stocks continue to push higher in a flat market, stay long. As soon as the momentum slows, take profits. Yesterday, the market tested both ends of the range and there was good intraday movement. In the last hour of trading we will see if we can find some option lottery trades, but I'm not very optimistic. We need a good market tailwind and we don’t have one. Support is at SPY $364 and resistance is at $368. . .

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