Use SPY $184 As Your Guide. Gradually Build Feb Call Positions Above That Level
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Yesterday stocks rallied out of the gate and those gains quickly evaporated. Traders probed for support and the damage was contained. Volumes are still light.
This is a busy week for economic releases (ISM services, ADP, FOMC minutes, initial claims and the Unemployment Report) and earnings season will begin on Thursday. Trading activity will gradually return over the next few days and we should be back to normal a week from now. Resist temptation for a few more days.
The macro backdrop is still very bullish. Global economic growth is stable and Europe is showing signs of a recovery. Central banks are printing money like mad and credit concerns are low. Corporate balance sheets are stronger than ever and they are using cash to buy back shares. These influences are very strong and I don’t see them changing in the next few weeks.
Politicians reached a budget deal and that bodes well for the debt ceiling negotiations. That is the last remaining dark cloud and the market will discount it. Republicans feel that Obamacare will implode want to stay out of the headlines until the November elections.
The FOMC minutes tomorrow should not generate much a reaction. There has been plenty of “Fed speak” and we know their intentions. Janet Yellen was confirmed yesterday and she is considered to be dovish.
Analysts are forecasting that 200,000 new jobs were created in December and we should be able to hit that mark. This report will be much less scrutinized now that the Fed has started to taper. We also know the revised target unemployment rate for ZRIP (zero interest rate policy).
The strongest companies tend to release early in the earnings cycle and the scene will be dominated by banks. Current results might be a bit lackluster, but the next quarter looks bright. Interest rates are rising and ZRIP will be in place for a long time. That means the spread between the borrowing and lending rate will expand. That is good for profits.
I am not sensing any urgency on the part of bulls and I need to feel that energy. Stocks need to grind higher and I want to see follow-through the next day. If the SPY trades above $184, I will start to nibble.
My plan is to gradually build a February call position. I don’t believe we will see a sustained rally before January expiration and time decay will be an issue. That is why I am going out a month. Give your call positions time to work out. By going into February, you will span earnings releases and the implied volatilities will expand.
There is one possible bump in the road this week. Retailers will start posting results and I think they will be soft. Consumers are cautious and two companies (HGG and SCSS) warned yesterday. This news won’t have a long-lasting impact. Buyers will blame the dismal results on the weather and any dip will quickly be reversed.
Be patient for a few more days and use SPY $184 as a guideline. Trading volumes will return next week and I am expecting a new market high in January.