Buyers Are Nibbling But No Conviction Until the FOMC. Sell Bullish Put Spreads On That Dip

January 28, 2014
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Last Friday the market breached a key support level at SPY $181.50. Once the momentum was established, buyers pulled bids and we hit an air pocket. Yesterday, we probed for support and we bounced off of SPY $177. That is just above the 100-day moving average.

The price action today looks strong. Stocks were able to shoulder a weak earnings report from Apple and a soft durable goods number. The market was grinding higher and a better-than-expected consumer confidence number added fuel.

China is likely to bailout its credit trust and that concern has been lifted. The Fed will taper and emerging markets will have to adjust naturally. Tomorrow afternoon the FOMC will release its statement and we should see a pullback on the news. Once the dust settles, stocks should move higher.

If the Fed decided not to taper, the initial reaction would be bullish. However, that move would quickly reverse. It would be a sign that the Fed is handcuffed by smaller economies. The stock market would tank days later.

Earnings have generally been good and I like the next round of releases. The majority of companies have exceeded estimates and profits are growing at a 7% rate. Cash flows are very strong and companies continue to buy back shares.

Economic conditions are stable. Durable goods orders are extremely volatile and I tend to ignore the number. Initial jobless claims have been declining in recent weeks and the jobs report next week will be bullish. We are likely to see a revision to the December number.

Official PMI’s will be released next week. China will weigh on the market, but traders might give Europe a fair shake. The soft patch in Asia is more than offset by the rebound in Europe.

Here is how I see things playing out the next few weeks. The market looks strong today, but the action will be choppy. The earnings overnight will be good and the open tomorrow should be positive. We are likely to give back some of the gains after the FOMC announces a $10 billion taper. The market will decline Thursday, but the damage will be relatively contained.

The price action will generally be positive next week and the economic numbers will support a rally. We should be able to challenge SPY $181.50. That was support and now it represents resistance.

Looking out to February, the rebound will hit resistance before the all-time high is challenged. Currency issues in Turkey and Argentina will weigh on the market. Politicians will sling mud ahead of the debt ceiling and investors will get nervous. During a period of consolidation, the market will gather strength. When the debt ceiling is extended we will challenge the highs.

This timetable extends into March. If growth in China is stable and the economic rebound in Europe continues, we will challenge the high. If global economic conditions are tenuous and emerging markets are weak, we will trade in a tight range in March.

Credit concerns are ever-present and they are a wildcard. Currency issues need to be contained. If they spread into global credit markets and PIIGS yields rise, we could be in for trouble. This is the one variable I monitor very closely and quite honestly, it is why I don’t like to forecast more than a month out.

The bid is coming back, but Asset Managers will not be aggressive. You need to exercise caution ahead of the Fed. After the announcement, an excellent opportunity will present itself.

I like selling out of the money put credit spreads. This strategy allows me to distance myself from the action and I can take advantage of inflated option premiums. I will sell spreads below technical support and time decay will work in my favor. If that support is breached, I will buy back the spread.

Focus on strong stocks that are in an uptrend and have already announced earnings.

I am seeing some great bargains. Line up your longs and wait for the next decline.
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