Market Rally – Go Baby Go. Let Your Call Positions Run! First Target Is SPY $181.50

February 7, 2014
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Last night I recorded a webinar. CLICK HERE TO WATCH THE VIDEO

Go baby go! I have been urging you to get long this week and you should make some serious money today.

The jobs report today showed that in January, 114,000 new jobs were created. That was much worse than analyst projections (185,000). December’s number only increased by 1,000 jobs and that was much lower than expected. The government provided weather related statistics so that economists can evaluate the true employment scene.

Typically, stocks would have tanked on this number. After the release, the downside was tested briefly and buyers stepped in. The S&P 500 is up 10 points before the open.

The market wanted to rally before the number and there are a couple of factors at play. First of all, bears got short when the 100-day moving average was breached. I’ve been mentioning that Asset Managers have been waiting in the wings. They started to buy on Tuesday and the squeeze is on. Bullish speculators will pile back in today.

The temporary decline in employment can be attributed to bad weather. Traders are sensing that the Fed might postpone the next taper so that this soft patch can run its course.

The debt ceiling deadline has officially been reached today. However, the US Treasury has enough money to keep is going through the month. Congress will be in recess from February 12th through February 22nd. That means they need to reach an agreement in the next few days. Rumor has it they are close.

Speaker of the House Boehner said that the GOP will not threaten default. They would like to see military benefits restored and/or the Keystone Pipeline approved. These demands are relatively small and they are popular with voters. If the debt ceiling is extended, the market will jump.

Earnings season has been excellent and profits are up 7.5%. That is a strong pace and cash flows are at record levels. I’ve been telling you that corporations will take advantage of this dip and they will repurchase shares. This morning, Apple said that they have bought back $14 billion in stock since they posted earnings two weeks ago. This is an incredibly strong force.

I know this selloff has been scary, but it presented us with a fantastic buying opportunity. Macro conditions were intact and this was nothing more than a small correction within a long-term uptrend. I believe that some of the decline was related to the carry trade and hedge funds were forced to liquidate so that margin calls could be met. The exposure was fairly light and the market was able to quickly recover.

I also mentioned that I was not going to short the market. I could have made a little money, but I would have been scrambling to cover. That would have taken my focus off of the better move.

Instead of monitoring my shorts, I was searching for bullish opportunities. When the market bottomed I started scaling in.

I have been selling out of the money put credit spreads and those positions are a nice shape. Wednesday morning we retested the lows and major support at SPY $173.60 held. That bounce was quick and that is when I started scaling into call positions.

My initial call in January was wrong. I thought that the momentum would continue and that earnings season would push us higher. My stop was at SPY $181.50 and when that level was breached I quickly took my losses. The good news is that the selloff was going to provide us with a great opportunity – we just had to be patient.

We got the capitulation low on Monday and we retested it on Wednesday.

Over the last 25 years I can tell you that my biggest winners come after I’ve taken a loss. I know why that happens. I conduct extensive analysis and I always try to get every variable in my favor. When I am wrong, I stop the trade out. Typically, new information has me on the wrong side of the trade and the stock adjusts. After I evaluate the news I can normally find an even better trade on the backside. I wait patiently and ramp up my size (relative to the first trade).

Today’s comments were little lengthy, but I hope that some of my insights help to improve your trading.

You should have the majority of your positions on. Add on strength and move your stop up to SPY $177. We are back above the 100-day moving average and that level should hold. My first target is SPY $181.50.

If you took my advice this week, you’re going to have a great weekend.
Congratulations!
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