Earnings Sweet Spot Not Attracting Buyers – Market Needs To Rebound Today

Posted 10:00 AM ET - Yesterday the market probed for support and it was able to rebound. Stocks finished on the high of the day and the table was set for a follow-through rally when Google posted excellent earnings after the close. This is the "earnings sweet spot" and the market needs to rally if it is going to reach SPY $200. Unfortunately, the S&P 500 is down 20 points this morning. This is not the price action we wanted to see. Weak earnings in Europe and dismal results in the energy sector are weighing on the market. The SPY is going to test support at $191.50 this morning and it needs to hold. More substantial support is at $187.50. As long as that level holds, my bullish put spreads will be in fine shape. If the selling accelerates today, I will short the S&P futures as a hedge. I will use $191.50 as my entry and my stop. This strategy allows me to protect my positions in the event that a major decline unfolds. It is one instrument and it's easy to put on and take off. I can maintain all of my bullish put spreads without worrying about positions or having to adjust. The bullish put spreads I have sold are out of the money and they have plenty of breathing room. I like selling them after companies announce strong earnings. The short strike price is below technical support. As long as that technical support holds, I maintain the position and I let time decay whittle away at the premium. These stocks also have relative strength. They hold up well in a declining market. I've been very cautious on the long side. I have been day trading from the long side – no overnights. These market gains are very hard fought and we should be moving higher with ease after a capitulation low. The price action I've seen tells me that this is a bounce and nothing more. If I'm wrong and the market shoots higher, I won't feel like I missed a great opportunity. In fact, I will be licking my chops because an excellent shorting opportunity will arise. ISM manufacturing was weak as expected. Tomorrow, ISM services will be decent and ADP should be fine. The Fed posted dovish remarks last week and a rate hike before June is unlikely. That means we can get a solid jobs report Friday (200K) without worrying about it being "too hot". The BOJ and PBOC have been easing and that should support Asian markets. China will be closed until 2/12 to celebrate the New Year. The market needs to recover this morning and we need to see strength the rest of the week if we are going to reach SPY $200 in February. I feel that the SPY needs to close above $195 this week. As we get into the second half of earnings season, the results will disappoint. Retail and energy will weigh on the market. I will be day trading from the long side this morning. I like buying when the market gaps down. I can instantly spot strong stocks and when the market finds support they pop. If the market rebounds (like yesterday), the stocks jump. The overnight news did not seem that dire. At very least we need to close above SPY $191.50 today. If by chance the rally stalls this week, I will be ready to sell out of the money call spreads. Option implied volatilities are rich and I believe we will be range bound through February options expiration. That range is likely to be SPY $187.50 - $194. If the market continues to drift lower today, my short S&P hedge could make money as long as my bullish put spreads tread water. I do not plan to hold my hedge overnight. If some of the stocks with bullish put spreads weaken, I will consider reeling some of those spreads in to reduce risk. Most already have nice profits. . .

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