The market has rallied 8% in a couple of weeks and it feels tired. Asset Managers don’t want to chase at an all-time high, but they are not taking profits either. It looked like we might see some selling earlier in the week.
On Tuesday, stocks surged higher after the Unemployment Report. That move faded quickly and we hit resistance. I took profits and I’m happy to be on the sidelines for now. It does not look like we will pullback very much. That would’ve already happened on Wednesday and Thursday if it was in the cards.
Typically, the market has rallied into the first few weeks of earnings season. Once the strongest companies have reported, the market goes into a bit of a lull. That could be different this time around because cyclical stocks (GE, RIO, BHP, NSC, BA, WHR…) are catching a bid. Global economic conditions are improving.
End of the month fund buying should provide support next week. After a few days of rest, the market will gather strength and it will grind higher.
All of the puzzle pieces are in place. Earnings have exceeded estimates, the debt ceiling won’t be an issue until December, the Fed will not taper until 2014 and the flash PMI’s were decent.
If the SPY closes above $176, I will buy some calls. I want to limit my downside and this strategy limits my downside.
Buy November calls on cyclical stocks. Look for strong trends and horizontal breakouts. Use that breakout as your stop. These moves tend to last a few days. When they run out of steam, look for the next opportunity.
Trim your size and don’t get too aggressive unless we have a pullback. Any decline will be brief and shallow. Support at SPY $173 will hold.
I’ve been encouraging you to reduce risk this week. If you are completely on the sidelines, consider taking a few long positions if we close above $176. I do not see any speed bumps on the calendar next week.