Support at SPY $164 held. You Should Have Bought Calls As Outlined. Get Ready For the Next Leg.

June 4, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Yesterday, the market tried to rally early and that move did not gain traction. Sellers probed for support after a weak ISM manufacturing number and we eventually found support. Buyers stepped back in after a few hours of trading and the SPY rallied back above support at $164. If you took my advice, you bought calls.

ISM manufacturing fell to its lowest level since November and I believe we are seeing the effects of defense spending cuts. This is one of the reasons the Fed will remain accommodative for the next few months. They want to see how all of this plays out. GDP, durable goods and Chicago PMI were decent last week. I favor a mixed bag of economic releases because it keeps Goldilocks intact.

Major economic releases are slated tomorrow. ISM services, ADP employment and the Beige Book will show sluggish growth. Initial jobless claims have been declining during the last month. Analysts are expecting 165,000 new jobs on Friday and we should be able to hit that number.

We will get a big wave of economic releases from China Sunday night and then the news will dry up. Earnings season is more than a month away and the summer doldrums will set in. This favors the upside. For the first time in years, we won’t have to deal with credit concerns.

As I mentioned yesterday, the selloff Friday removed speculative fluff. The market was overbought and we needed to flush weak hands out of their positions. Support at SPY $164 was tested and it held. Get ready for the next leg of this rally.

If you look back over the last eight months, you will notice that the dips have been brief and shallow. The market spends a few days below the 20-day moving average and it rebounds. In most cases, that soft patch leads to a new relative high.

Asset Managers won’t chase stocks at an all-time high. When the rally is over-extended, they pulled bids. Even a light round of selling can result in a big decline when buyers put their wallets back in their pockets. Once support is established, Asset Managers start bidding again and stocks rebound.

I do not view the Fed as a potential roadblock for this rally. They have been accommodative for more than five years and they will not strangle economic growth at this stage. If they do taper (and I hope they do) it will be because activity is improving. Sooner or later the punch bowl has to be removed.

European credit conditions and growth in China/US are the pillars for this rally. As long as they are stable the market will rally.

Corporate earnings growth is flat year-over-year, but cash flows are strong. Companies are using that cash to buy back shares and stocks are attractive relative to bonds.

You should have a nice call position by now and you should be profitable. I am expecting a few more jitters so I am leaving a little breathing room. I have reached 60% of my normal size and I am adding today.

This was a buying opportunity and I hope you got on board. Sellers probed for support and found it. Look for a steady grind higher the rest of the day.

The market could pullback and test SPY $163 this week, but I doubt it. We will use the low from Friday as our stop.
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