Watch For Signs of Support. We Are Close To A Bottom. Start With Bullish Put Spreads
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The FOMC stuck to the plan and they reduced bond purchases by another $10 billion. This was a market moving event and the initial reaction was bearish. The damage was contained. We did not hit an air pocket yesterday – get ready to buy!
The Fed can’t be influenced by emerging market currency fluctuations. If they did not taper, it would’ve been a sign that they are painted into a corner.
Turkey raised interest rates by 5% and they currently stand at 12%. This was a dramatic move and it demonstrates the gravity of the situation. Fortunately, PIIGs bond yields have been stable and credit concerns are not spreading. I will constantly monitor this situation. If this changes, it will be a bearish warning sign and the selling will continue.
China will bail out their $500 million credit trust and that will set a precedent. This was never really a big threat, but the news came during a tenuous moment.
Official PMI’s will be released Monday. Growth in China will slow, but GDP is still at 7.7%. Europe will show steady progress. It has weighed on the market for years and this could be a catalyst for global markets. This news was swept under the carpet and it more than offsets a soft patch in China. Perhaps EU growth will get its due next week.
US employment data will also be released next week. Initial jobless claims have been declining the last few weeks and the reports will restore confidence. Decembers Unemployment Report will be revised upwards.
Earnings season has been good. The majority of companies have exceeded earnings estimates and profit growth is above 7%. Cash flows are at record levels and buybacks continue.
Asset Managers pulled bids when the news got heavy. They are waiting for this wave of profit taking to run its course. When support is established, they will buy stocks.
The SPY has tested the 100-day moving average many times in the last year. Each time that represented a fantastic buying opportunity. This is a normal correction with in a bull market.
Politicians want to stay out of the headlines and the debt ceiling will be extended. Any positive rhetoric will fuel the bounce.
Global markets declined overnight, but that was in response to our sell-off.
Strong stocks that posted great earnings pulled back with the market. They are ripe for the picking and I believe the market will find support in the next few days.
We might still see some nervous trading so I will start by selling out of the money put credit spreads. This strategy will allow me to distance myself from the action and it will take advantage of time decay and elevated implied volatilities. The key is to focus on strong stocks that have announced good earnings and that have held up well during this market correction. I also like to keep a technical support level between the current stock price and the shorts strike. If that technical support is breached, I buy back the spread.
If I sense that the market is ready to grind higher, I will use the proceeds from the credit spreads to finance call purchases. A close above SPY $179 would be bullish.
Stocks are poised to start off on a strong note. If we do not probe for support in the first hour and we keep drifting higher, I will start selling put spreads. If the grind continues I will add to these positions. I need to see a close above $179 before I buy calls.
If the action is weak and there is a new low after the first couple of hours of trading, I will hold off.
I sense that the first scenario is more likely.
Get ready to buy this dip.