Get Ready To Buy Feb Calls. News In the Next 24 Hours Could Dampen Spirits. If Not – Buy Calls

January 8, 2014

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Yesterday the market opened higher and it was able to hold on to most of the gains throughout the day. This is a good sign and the bid is strengthening.

This morning, ADP showed that 238,000 jobs were created in the private sector during the month of December. That was much better than expected and it bodes well for Friday’s Unemployment Report.

Analysts are looking for 200,000 new jobs on Friday and we should be able to hit that mark. This number will be less scrutinized now that the Fed has started to taper. The jobless target rate of 6.5% is a long way off and the zero rate interest policy (ZRIP) will be in place for a couple of years.

The FOMC minutes this afternoon could spark a little selling. Traders will be looking for any hawkish statements now that employment conditions are improving.

Earnings season kicks off tomorrow, but it won’t heat up for another week. Banks will dominate the scene and the current quarter could be a little lackluster. However, interest rates are rising and the spread between the borrowing and lending rates is expanding. That is good for profits and the financial sector should perform well.

The strongest companies announce early in the earnings cycle and the market tends to rally into the numbers. Revenues might be flat, but cash flows have never been better. Companies are using that money to buy back shares at a record level. On a daily basis, 6% of the activity can be attributed to buybacks. More than half of the outstanding shares have been repurchased in the last 10 years. This is a very bullish event and the supply of equities continues to shrink.

Global economic conditions are improving and Europe could be a catalyst in Q1. Peripherals such as Spain are showing signs of life.

Central banks are printing money and credit concerns are low.

Republicans feel that Obamacare will implode before the November elections and they want to stay out of the headlines. This means that the debt ceiling will be extended without much of a fight in February.

My forecast for Q1 is bullish. I have been waiting to get long and I will nibble today if the price action is positive after the FOMC minutes. I will gradually build a February call position. The market still needs time to consolidate and January expiration is approaching. Time decay will be an issue for these options and that is why I am going out to February. Furthermore, February options span earnings season and the implied volatilities will hold up (or expand).

If the employment numbers are excellent, interest rates will creep higher. That will provide a small headwind. Retailers will start posting holiday sales numbers tomorrow and that could also dampen spirits. The effects will not be long-lasting. Traders will blame the dismal results on bad weather.

Rising interest rates, soft retail sales and a hawkish interpretation of the FOMC minutes could keep a lid on the market the rest of the week. If not, get long. It will be a sign that the buyers have returned.

Use SPY $184 as your guide. If we close above that level today, start scaling into call positions. The macro backdrop is very bullish and any decline will be brief and shallow.
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