Buy Calls! Support Was Tested Wed and the Market Bounced. Follow Through Today
Posted at 9:30 AM (Market Open) – Webinar tonight – register to the right. This is your chance to see how my systems are doing.
This week, we worked off the remaining jitters. The market tested support yesterday morning and it bounced immediately. Buyers stepped in and stocks inched higher all day. This morning, we are getting some follow-through. It is time to get long!
From a technical perspective, we wanted to breach the 100-day moving average. That happened during Monday’s meltdown and it served two purposes. First of all, it flushed the last remaining bullish speculators out of their positions. Secondly, it attracted short-sellers. In a classic manner, the market bounced on Tuesday and it retested support yesterday (SPY $173.60).
Prices are stabilizing and Asset Managers will buy with vigor. Shorts will cover and bullish speculators will jump back in. This buying pressure will push the market back to spy $181.50 in the next two weeks.
Earnings season has been excellent. Profits are up 7.5% year-over-year and they could increase by 8% once all companies have reported. Cash flows are at record levels and that money will be used for buybacks. Over 6% of the daily market activity can be attributed to repurchases and companies will take advantage of this dip.
Economic releases have not been as dire as the price action suggests. ADP reported that 175,000 new jobs were created in January. That was in line with expectations and it bodes well for tomorrow’s jobs report. Analysts are also expecting public and private payrolls to grow by the same amount. December’s Unemployment Report should be revised upward. Initial claims have been improving and a good number will restore confidence.
ISM manufacturing was released Monday and it was a catalyst for the decline. Construction spending suffered because of bad weather. Yesterday, ISM services came in better-than-expected.
Official PMI’s were released this week and China’s growth was above 50. That number was better than expected. Their economy is growing at a 7.7% clip. Europe’s activity is showing signs of life and that news will support a rally.
Credit concerns are starting to surface, but fear is not spreading. PIIGS bond yields remain stable. Turkey, Argentina and Puerto Rico are on the ropes, but the damage can be cordoned off. China’s shadow banking system is also being challenged and a small investment trust ($500 million) will be bailed out.
I am not saying that credit conditions won’t deteriorate. Global debt levels and deficit spending are at record levels. From my perspective, this will not be an issue for the next month (that is my trading time horizon).
Rumor has it that Republicans will stand the debt ceiling if the Keystone pipeline is approved. President Obama is getting pressure from both sides and this is a minor demand. When the debt ceiling is extended, the market will rally.
This is a normal correction within a long-term uptrend. I suspect that some of the selling was perpetuated by hedge funds that had currency exposure and they had to unwind positions to meet margin calls.
We need to see a nice rally this week and we need to distance ourselves from the 100-day moving average. The magnitude of the bounce will determine if the intermediate term trend is in jeopardy. A brief and shallow bounce would be problematic for bulls.
I sold out of the money put credit spreads on yesterday’s bounce and I bought calls when we poked into positive territory. I will add to call positions this morning if the market grinds higher after the first hour of trading.
My stop is at SPY $173.60. We do not want to revisit that level any time soon. The market has all the ammunition it needs to push higher today.
Buy February calls and look for stocks that are breaking out. You can also buy calls on stocks that are in strong uptrend and that have pulled back to a major support level. Use that support as your stop.
I’m seeing a lot of bargains and Asset Managers will scoop stocks now. We have tested support, the bid has returned and some of the uncertainty is gone.