Market Breakout Is Close – That Move Will Attract Buyers and Stocks Will Grind Higher

January 22, 2014
Author: Peter Stolcers, Founder of OneOption
Author
Pete

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Yesterday, the market tried to rally out of the gate. The initial push higher faded quickly and traders probed for support. This move was nothing more than earnings jitters.

The first week of releases has been tough the last few quarters. Financials have not responded well and tech leaders have faltered. I’ve been expecting strength in the financials and we have. Spreads are expanding and that is good for profits. Tech is another story.

Intel has been struggling and it historically set the tone for the entire sector. That is no longer the case. They projected flat earnings for 2014. There were some silver linings and it appears that PC weakness has bottomed out. Enterprise sales were up 8% and that is a good sign or corporate IT spending. IBM posted results after the close. They missed on both the top and bottom line. China was largely to blame. It is has lost its leadership status as well.

With these two giants behind us, I feel that the tech news will improve from here in. Traders were nervous and confidence will build the rest of the week. The overnight releases were not spectacular, but that will improve before the open tomorrow. I like the stocks that are on deck and the reaction should be good.

The S&P 500 is within striking distance of the all-time high. The market is treading water and it is waiting for positive news. Regional banks, cyclicals and tech will push stocks higher.

Corporate profit margins are healthy and any uptick in demand will go straight to the bottom line. That means P/E ratios will decline and valuations won’t seem stretched. Q1 guidance will be critical as earnings season unfolds.

Cash flows will hit record levels and buybacks will continue.

Traders always find something to worry about. Right now it seems to be a slowdown in China. While that might happen later in the year, I don’t see that as a risk at this time. GDP, industrial production and retail sales were all in line and the flash PMI on Thursday should calm nerves. Europe is a potential catalyst. Conditions continue to improve.

Credit concerns can flare up at any time, but PIIGS bond yields are at multi-year lows. This is not a current concern.

Politicians have a knack are screwing things up. The GOP and Democrats have both been humbled in the last six months and they are trying to save face ahead of the November elections. The debt ceiling will be extended without much of a battle.

The macro backdrop is very strong. With each passing day the bid will grow. The longer we stay in this range, the bigger the breakout.

Once the market makes a new high, stocks will grind higher for a week or two. Don’t miss this move.

I have a full position on and I will stick with it as long as the SPY stays above $183.

Buy calls on stocks that are breaking through horizontal resistance. We won’t have to wait long for the breakout and it could happen overnight.
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