Buy Feb Calls On Strength. Time To Gradually Build Bullish Positions. Trade Breakouts

January 13, 2014

11:30 AM ET – The market continues to tread water near the all-time high. It is digesting news and gathering strength. Earnings season cranks up next week and I am expecting a new all-time high in January.

I mentioned last week that there were a few headwinds that the market needed to work through. The FOMC minutes were deemed to be a little hawkish. Stocks shouldered the news and they prepared for retail results. Consumers were cautious this holiday and the results were dismal. This was priced into the market, but the news was worse than expected.

I believe there are a few new factors at work. First of all, there is over capacity. So many new stores have popped up in the last few years and they have outpaced consumption growth. Stores have expanded their offerings and shoppers can buy appliances, clothes and food at the same store. Deep discount, teen apparel, big box, home improvement… Look at all of the new stores in your geographic area and you will get my point.

Bad weather also played a role. Shoppers waited for the last minute and they did not spend as much. Perhaps, they purchased gift cards and those sales cannot be counted until the purchase is actually made.

Another issue is that consumers are purchasing big-ticket items so they need to cut back on the small stuff. This has been going on since August (back to school). Car sales are robust.

If you look at the overall sales growth reported by MasterCard, consumers are still shopping.

Regardless, I believe that retailers will continue to struggle. This is the only sector I would avoid.

Interest rates are rising and the Fed will keep ZIRP in place. That means the borrowing and lending spread will expand. That is good for bank profits. Financial stocks will dominate the earnings scene and J.P. Morgan and Wells Fargo will post results tomorrow. Q4 might be lackluster, but traders will look ahead.

Economic conditions in the EU are improving. That bodes well for cyclical stocks. Flash PMI’s will be released next week and we want that trend to continue. Stable conditions in China will also be important. We know that their growth target is 7.5%. If conditions deteriorate, we can expect stimulus spending and easing by the PBOC.

The debt ceiling will be extended without much of a battle and credit concerns in Europe will remain low. These two rally killers will not be a factor in Q1.

Earnings season will be in full bloom in another week. Revenues will be flat, but cash flows will hit record levels. Companies are buying back shares at a record pace and that will continue.

Now that the market has had time to consolidate, the bid will strengthen. Traders are back from vacation and I am expecting a new all-time high in the next two weeks.

January options are exposed to time decay. Start scaling into February call positions if the SPY trades above $184. I purchased some calls last week and I am ready to add on strength. If the SPY gets above $184.50, I will add. February options span earnings season and they will retain their value.

Focus on stocks that are breaking out through horizontal resistance. They already have momentum on their side and a market tailwind will push them higher.

The waiting period is over and it is time to jump and action. Gradually build bullish positions as the market grinds higher. Any dip will be brief and shallow.

Watch for signs of late day buying.
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