Start Scaling Into Dec Calls. This Soft Patch Won’t Last Long. News Has Been Good

November 5, 2013

Easy come – easy go. The market rallied yesterday and the gains have vaporized this morning. The macro news has been good, but the market needs to consolidate.

Retail sales, ADP, Chicago PMI, and ISM manufacturing were all better-than-expected last week. The official PMI’s were released yesterday and growth is steady in Europe and Asia. This morning, ISM services came in better-than-expected.

Earnings season peaked last week and the results have been good. Analysts are sticking with their projections for the S&P 500. Cash flows are at record levels and companies are buying back shares.

The FOMC statement last week was market friendly. They said growth is moderate and the Fed plans to maintain its bond purchases. I believe they will not taper until Janet Yellen takes office and the debt ceiling is extended. The political rhetoric won’t heat up for another month and stocks should have a nice tailwind.

Asset Managers won’t chase at an all-time high. The market needs to spend some time at this level and the buying pressure needs to build. When the volume returns and we make a new relative high, Asset Managers will buy stocks. They don’t want to miss a year-end rally.

US 10-year Treasury yields are lower than the dividend yield on the S&P 500. Stocks are attractively valued relative to bonds.

Global credit concerns are low and that dark cloud will not plague the market.

The market is stuck in a trading range. Bullish speculators need to get flushed out and we might be seeing that today. A small pullback will force them out of November call option positions and time decay has reduced their staying power. If we get a nice little dip, buyers will step in and that might be the catalyst we need.

I am on the sidelines. I exited my call positions last Friday when the SPY traded below $176. I did not reenter yesterday since the SPY did not close above $177.

This soft patch won’t last long. I will be much more aggressive in my call buying if we get a dip. Line up your bullish picks and be ready.

If we see a little profit taking and bullish speculators do get flushed out this week the market will find support at SPY $173.75. That is the previous high and it represents horizontal support. That is also the 20-day moving average. The news has been relatively good and I don’t believe we will get that low. If we do, it is a gift.

The decline today should find support. If we close above SPY $176, I will buy some December call options. Ideally, the market will continue to drift lower tomorrow and I will be able to add at better levels.

Buy dips once support is established.
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