Scale Out of Call Positions – Take Profits. If SPY Closes Below $162 – Get Out Completely
Yesterday, the market rallied above SPY $162. That was my first target and I took profits on my call positions. This morning, we are back up to that level and we are struggling to maintain it. I am locking in my gains right now.
We caught the capitulation low and I am not going to give back profits during a light volume market. ADP and ISM services will be released tomorrow and traders will lean on that information. ADP is expected to come in around 160,000. Initial claims have been good the last four weeks and we should be able to hit that number. If we are off materially, traders will not wait for Friday’s number, they will adjust immediately.
That means that Friday’s number will be a non-event. Traders will take Thursday and Friday off so this is like a four-day holiday. We might see a small reaction during the first hour of trading on Friday and then everything should come to a screeching halt.
From a trading perspective, I don’t want to be long puts or calls. Once the ADP number is out, implied volatilities will decline. Time decay will also be an issue.
The initial shock of higher interest rates will wear off with each passing week. The market will focus on economic releases and good news will be good for the market. That is a shift from the prior state where good news was bad for the market because it signaled the end of QE. Now we know that the Fed intends to taper.
When we come back from holiday, earnings season will begin. Alcoa announces after the close next Monday. Major announcements don’t start for two weeks. Corporate guidance for Q3 will be very important.
The market has bounced and I still believe there is room to move up to SPY $164. After that, prices will get a little stretched and we will chop around. Banks will dominate the earnings scene in 2 weeks and the results should be good.
European credit concerns are starting to flare up a little bit (nothing like prior years). PIIGS yields are creeping higher, but the ECB has support from the EU members. I’m not expecting credit concerns to be an issue this summer.
Look for heavy volume after tomorrow’s economic releases. The price action will settle down and we could be in for a very quiet stretch the next two weeks.
Scale out of call positions. If the market closes below SPY $162, exit call positions completely. I believe tomorrow’s numbers will be market friendly, but I do not want to take big risks before a lull. If the number sparks selling, the bid will disappear and you will sacrifice a lot of the profits you’ve made.
I’m already flat. If I miss some upside, I don’t care. I have “gone to the bank” and I will have a smile on my face this holiday.