Nothing More Than An Air Pocket. If SPY $181.50 Holds This Morning – Buy Feb Calls

January 14, 2014
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Posted 9:30 AM ET – Yesterday the market hit an air pocket and today everyone is scrambling to explain it. This is nothing more than a simple adjustment. As I’ve been saying, dips will be brief and shallow.

Your exposure should have been very small. If you were waiting for a breakout above SPY $184, you did not have a position and you were rewarded for being patient.

I bought some February calls last week and I took some heat yesterday. I am not remotely worried about these losses because I kept my exposure small. My plan has been to gradually ease into call positions and now I will be able to do so at a better level.

In December, the market broke through resistance at SPY $181.50. It drifted higher into year-end and then consolidated. Now we have tested the breakout and the table is set for a nice rally. This is a very normal price pattern.

Fed speak revealed that they plan to taper in coming months. Friday’s jobs report was a joke and everyone knows it will be revised. The Fed wants to reduce its balance sheet and that will put upward pressure on interest rates.

Asset Managers are rotating some money out of equities and into bonds. That shift sparked a small wave of selling. The bid has been strong and the market has been able to shoulder the bad news as it mounted last week. Yesterday, buyers finally threw in the towel and they pulled their bids. Now they will buy at better levels. Bullish speculators were flushed out and once the momentum was established, we hit an air pocket.

Retailers are struggling, but I believe the dismal results have more to do with over-saturation than anything else. There are simply too many stores and some will fail. Online purchases are growing and consumers have been spending money on big-ticket items (cars). You look at revenue growth for the major credit card companies. Consumers are alive and well.

This morning, J.P. Morgan and Wells Fargo posted results. Both companies had better-than-expected results. Banks will dominate the earnings scene in the next week and the future looks bright. Write-downs are decreasing and spreads (the difference between the borrowing and lending rate) are expanding. This is good for profits.

Intel will post results after the close Thursday. They have entered the mobile market and the results should be good. Enterprise spending has been showing signs of life and this will be scrutinized. Asset Managers want to see growth in corporate IT spending.

Europe posted a better-than-expected IP number (1.8% versus 1.4% expected). This is excellent news and it bodes well for next week’s flash PMI numbers. Any recovery in Europe will push global markets higher. I am not expecting a huge rebound, but this improvement should last through the first quarter.

Corporations continue to buy back shares at a record pace. Many have almost exhausted free cash flow and this impetus might lose some steam later in the year. For now, it is pushing stocks higher.

In general, revenues will be flat and cash flows will hit record levels. Companies are using that money for mergers as well.

Now that the market has pulled back, I plan to get more aggressive with my call purchases. If the market probes for support, it will do so in the first hour. If it does not challenge SPY $181.50 we will continue higher and that support level will hold. I don’t need a lot of proof and I will not hesitate to get long today.

Monitor the action during the first hour. If we don’t have much of a dip, it means that buyers are close at hand. Buy February calls if you see this. Focus on stocks that are breaking through horizontal resistance. I believe this is the most likely scenario.

If the market probes for support and it easily falls through $181.50, wait for support.

If the market closes below SPY $181.50 today, I will exit my call positions and I will wait for a better entry point.

In short, I see this as an excellent buying opportunity ahead of earnings season and I am anxious to get long. I just need to make sure the breakout holds.
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