Ease Into Call Positions. News Is Light and That Favors the Momentum.

May 6, 2013

Last week the market surged to a new all-time high and it convincingly broke through resistance. The expectations for Friday’s Unemployment Report were low and the number came in better than feared. April’s job growth exceeded estimates by 15,000, but the March revision (up 88,000) was the real shocker. Traders that claimed there was a seasonal adjustment were vindicated. Stocks liked the news and we will grind higher this week.

With all of the major releases behind us and earnings season winding down, there is nothing to stand in the way this week. England and Japan were closed today and volumes will be light.

I can’t get too excited about this breakout. First of all, 165,000 new jobs won’t even cover the number of new entrants into the labor force. We need at least 250,000 jobs to break even. Every single economic release in April came in below estimates. ADP came in below estimates and I give their employment number more weight than I do the government’s estimate. They actually process payrolls and I deem their number to be accurate.

Conditions in Europe remain weak. There is talk that activity is bottoming out, but we’ve heard that before. China’s growth rate is 7.7% and their government does not have any stimulus plans.

Traders are hoping that the FAA (air traffic controllers are back to work) might pave the way for other agencies to postpone furloughs/layoffs. That was a public safety issue and I believe the sequester will resume as planned.

There are rumblings that the debt ceiling could be extended by three months. Republicans are trying to forge new tax laws and as long as there is progress, they seem willing to raise the debt ceiling. This has not weighed on the market, but an extension could clear the path for higher prices this summer.

US stocks remain attractive. Central banks are printing money like mad and that is keeping interest rates and credit risk low. As long as this continues, money will continue to flow into equities.

Corporate balance sheets are strong and cash flows are at record levels. At a forward P/E of 15, stocks are not expensive.

I can’t fully embrace this rally, but I am buying calls. I missed the breakout and I will gradually ease in. I plan to build to 25% of my normal position and hold. I will also be day trading. This strategy allows me to reduce overnight risk exposure and I am able to catch most of the moves.

Look for stocks that are breaking through horizontal resistance on strong volume. These moves have a tendency to follow through for at least a few days. I do not suggest buying cyclicals. They will bounce, but I am not seeing signs of a global economic recovery.

The market breakout means that we have a new support level (SPY 159). Use that as a stop for long positions.
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