Market Shouldered the Overnight News. SPY Target of $184 Has Been Reached – Buy Feb Calls

January 9, 2014
Author: Peter Stolcers, Founder of OneOption
Author
Pete

The market gradually floated higher after Christmas and that was the icing on the cake. The volume was light and stocks got ahead of themselves. A holiday hangover and a winter vortex kept buyers at bay. We’ve had time to gather strength and it is time to scale into February call positions.

Yesterday, a strong ADP report did not dampen spirits. Interest rates were stable and the market was able to tread water. The FOMC minutes were a bit hawkish and profit-taking was minimal. This morning, department stores are reporting retail sales and the results are soft. Once again, the market has been able to shoulder the news. This price action tells me that buyers have returned.

The Unemployment Report tomorrow should come in around 200,000. A number between 150,000 and 250,000 won’t sway the market one way or another. From this point on, it’s all about earnings.

Interest rates are creeping higher and the Fed will maintain its zero rate interest policy (ZRIP). That means the spread between the borrowing and lending rates is expanding. Banks love this scenario because it is good for profits. The financial sector will dominate earnings season during the first two weeks. Q4 could be lackluster, but buyers will look ahead.

The strongest companies tend to announce early in the earnings cycle. When Apple, Google, Facebook, and other high-fliers are in sight, the market will grind higher.

Corporate revenues will be flat, but cash flows will be strong. Companies are repurchasing shares at a record pace and 6% of the daily market volume can be attributed to buybacks. Half of all outstanding shares have been retired in the last 10 years. This means there are more dollars chasing fewer equities. Simple economics dictates that prices will move higher.

Global economic conditions are improving and any uptick in demand will go straight to the bottom line. Companies are lean and mean.

Central banks continue to print money and credit concerns are low. PIIGS bond yields are actually declining.

Republicans feel that Obamacare will implode before the November elections and they want to stay out of the headlines. The GOP negotiated and the budget passed. Traders will assume that the debt ceiling will be extended without much of a battle in February.

The macro backdrop is very bullish. I am scaling into February call positions. The market might need a few more days to gather strength and January options are exposed to time decay. February options also span earnings season so the implied volatilities will hold up – they could even increase.

My first target is SPY $184. If the early gains today hold up I will buy calls. My next target is SPY $184.50. That would be a new high and if we close above it I will add to positions. If I don’t hit my targets, I will wait patiently on the sidelines.

My day is spent looking for stocks that are breaking through horizontal resistance. They already have momentum and when the market breaks through these stocks will have stiff tailwind.

The market is getting ready to make a new high – get long.
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