Breakout and Follow Through. Overnight News Good – Stocks Will Grind Higher.

May 8, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

After last week’s breakout to a new all-time high, the momentum clearly points higher. No one wants to step in front of this freight train.

The overnight news was “market friendly”. Traders are keeping a close eye on China’s activity. Trade numbers came out better than expected and this will calm nerves until a big round of economic releases next week (industrial production and retail sales).

I mentioned yesterday that Germany’s Finance Minister has done a 180. He now believes that a centralized banking authority is in the best interests of the EU and he wants to move forward quickly. This change of heart will keep European credit concerns subdued as long as progress is being made.

In the US, the debt ceiling has not been much of an issue. The Treasury has enough money to get through October and the GOP is pushing for a flat tax. As long as the rhetoric is constructive, they might be inclined to extend the debt ceiling. This development also takes another potential roadblock out of the equation.

Traders still believe that the recent economic soft patch is nothing more than a seasonal adjustment. Until they have concrete evidence that conditions are deteriorating, they will buy stocks.

Earnings season is winding down. Cash flows are at record levels and balance sheets are strong. Companies are buying back shares and that is bullish for equities.

Central banks continue to print money and that is putting downward pressure on interest rates. Bond yields are at historic lows and they offer a negative real rate of return (inflation-adjusted). The dividend yield on the S&P 500 is greater than the yield on US 10-Year Treasuries. A forward P/E of 15, stocks are not overpriced.

The news is very light this week and stocks will grind higher. I am seeing a bullish pattern where the market opens on its low and closes on its high. We should see follow-through the rest of the week.

I am long June calls and I have 25% of my normal position. I am day trading from the long side and I still want to keep my overnight risk exposure low.

You should be long calls by now. Continue to ease in and don’t go overboard. As long as support at SPY 159 (the breakout) holds, stay long.
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