Buy Nov Calls. Market Might Be Soft Tues – Rest of the Week Should Be Strong.

October 28, 2013

Last Tuesday, the market rallied to a new high and it backed off throughout the course of the day. It looked like we might see a little profit taking, but that never materialized. Stocks gradually inched their way back and Asset Managers are still engaged.

Earnings season has peaked and the results have been decent. Analysts are sticking to their overall projections for the S&P 500. Revenues are flat and profits inched higher. Cash flows are strong and companies are buying back shares. Guidance has been mixed, but there are slivers of improvement in Asia.

Apple will announce after the close. The stock has been grinding higher and it could be a sell the news event. However, Carl Icahn has been pushing hard and we might see stock repurchases or a special dividend. Facebook is another major announcement later in the week. We will also hear from HMOs and pharmaceutical companies. The news should be consistent with what we have already seen in Q3.

Retail sales will be released tomorrow. Consumers have been cautious and this could spook the market.

ADP will report private sector job growth on Wednesday. Traders will lean on this number because the Unemployment Report will not be published until November 7th (a week late due to the shutdown). Analysts are expecting 160,000 new jobs and the ADP number should be in line. Buyers will have a little more confidence getting long once it is released. Later in the day, the FOMC will release its statement. They will remain accommodative to 2013 and the comments could also attract buyers.

Fund Managers will buy into the end of the month and the market should grind higher into the weekend. Initial jobless claims and ISM manufacturing won’t stand in the way.

The government shutdown will impact economic releases. If they are good, the market will rally. If they are bad, traders will blame it on the shutdown and they will look past the number. From my perspective, this is a win-win situation.

Global PMI’s will be released a week from today. The flash numbers were in line and conditions are gradually improving in Asia and Europe.

The continuing resolution and the debt ceiling have been pushed back. The Fed will remain accommodative until these are resolved and the market should have a nice tailwind.

After an 8% run in a couple of weeks, the market needs to take a breather. It will consolidate for a few more days and the bid will strengthen. We did not pullback last week and that tells me that buyers are close at hand.

We could see a little weakness tomorrow and that will quickly find support. I don’t believe we will get down to SPY $175. The news the rest of the week should be market friendly.

The SPY is currently above $176 and I am buying November calls. I am also day trading from the long side. I know that I might take a little heat overnight, but I don’t believe the pullback on Tuesday will be very severe. At worst, the market will find support at SPY $175.

Look for stocks that are breaking through horizontal resistance and are in a strong uptrend. Cyclical stocks are catching a bid. Transportation and basic materials look strong.

I don’t like to chase the market so I am trading a third of my normal size.
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