After a light round of profit taking, the market found its footing last week. All of the economic releases were better than expected and Asset Managers are starting to embrace tapering. As you can see in today’s chart, the momentum is starting to wane.
The market is likely to drift higher and we will challenge the all-time high this week (SPY $181.75). The price action will be very dull and the trading ranges will be established early in the day. During the last few weeks of trading we will see a few overnight “pops”. Stocks will gap higher and if you are not long, you will miss the move.
There are a couple of events that could serve as catalysts. The Fed will meet for the last time in 2013 and their statement will be released on December 18th. Traders (90%) are not expecting them to taper, but the actual news could spark a light volume relief rally. We are also going to hear that Congress is close to a budget deal, but don’t count on it. As long as the rhetoric is constructive, the market will rally on the rumor.
Traders tend to discount the CR and the debt ceiling until the 12th hour. We won’t hit the first time line until the middle of January and sellers won’t worry before the end of 2013. We could see some profit taking if the market gets above SPY $185.
The market surged higher on the Goldilocks jobs report last Friday. After the initial move we fell into a tight trading range. I sensed that the momentum would stall and I did not buy any calls. Today, the range has collapsed after the opening move. Option buyers need momentum. Without it, time decay will result in losses.
We need to digest the news from last week and the market is bumping up against the all-time high. I don’t want to buy calls unless we break out above SPY $181.75. For the rest of the year, I will keep my allocation at 20%. The only exception would be a pullback of more than 5%. Our chance for that type of move this year came and went last week. The bid is strong and stocks were able to quickly recover.
I like to have the stock and the market working in my favor. Unfortunately, I don’t believe the market will provide much of a tailwind.
Look for stocks that are in an uptrend, have consolidated for a few weeks and are breaking through horizontal resistance. Buy in the money calls that have a high delta. Also look for stocks that have a very consistent pattern (tight not choppy).
Consistency is the key. These options are more expensive from a dollar standpoint, but they are less vulnerable to time decay. They will move point for point with the underlying stock and the liquidity is typically very good. Use the breakout as your stop.
The action will look like this: dull, dull, dull, gap up, dull, dull… There will be a positive bias, but the next few weeks will be like watching paint dry.
If you buy some calls that conform to the pattern I described, they will be flat to slightly higher. Then they will come to life when the market gaps higher overnight. You can’t time these moves.
Like last Friday is a great example. You were in or you were watching from the sidelines.
Be patient, get long and keep your size small.