Don’t Trust the Jobs Report. Market Shouldering Weak Retail Sales. News Will Improve – Buy Calls

January 10, 2014
Author: Peter Stolcers, Founder of OneOption
Author
Pete

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This week the market has shouldered a round of soft news. Stocks could have sold off on profit taking, but they didn’t. That tells me the bid is still strong.

Retailers have been reporting dismal results and they are getting nailed after the news. Consumers have been tight-fisted and we saw that heading into the holiday season. Stores were open longer and the discounts were deeper. Bad weather also played a part. I mentioned earlier in the week that this was a potential speed bump.

The FOMC minutes came out and they were benign. Some traders interpreted them to be a bit hawkish.

ADP exceeded estimates and small business employment growth in December was excellent. This morning, the government released the Unemployment Report. Analysts were looking for 200,000 new jobs and only 74,000 new jobs were created. I would not read too much into this number – it will be revised.

If you’ve been reading my comments for more than a few months, you know I have very little faith in the government. The market scrutinizes this BLS number, so I can’t completely ignore it. I put a lot more weight on the ADP number. They actually process payrolls for small businesses and they have their finger on the pulse of the economy. You might also recall that a scandal was revealed a couple of months ago where the jobless statistics were manipulated ahead of the 2012 elections.

It is laughable that the jobless rate fell to 6.7% (.2%) when we only added 74,000 jobs. If everyone would just stop looking for work we could get this to 0%.

All of the other data points suggest improving employment conditions. The market is trying to hold up today, but we could see some selling this afternoon if buyers decide to pull bids into the weekend.

This dip will be a buying opportunity and the news will improve next week. Earnings season kicked off and banks will start reporting. I believe the financial sector will perform well. The strongest companies report early in the earnings cycle and the news will attract buyers.

We have to wait for this soft patch to run its course. The market will gather strength and it will challenge the highs of the year in the next couple of weeks.

I did purchase some February calls Wednesday and Thursday (small). If the market is able to close above SPY $184, I will add to positions. My next target is a close above $184.50. When that is achieved I will add.

Start lining up stocks that are breaking through horizontal resistance. They already have the momentum, they simply need a tailwind. When the market catches a bid, these stocks will take off.

Buy February call options. January options are exposed to time decay and we might not see much improvement before expiration. February options also span earnings season so they will retain their value better.

If you can stand the heat, start nibbling today. Know that you are early and positions could move against you slightly. Any dip will be brief and shallow.

Passive traders can use SPY $184 and $184.50 for their purchase triggers.

Be ready, a nice rally lies ahead.
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