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This week the market took a little breather. We started off on a weak note and rebounded Tuesday. Sellers returned on Thursday and an afternoon rally saved the day. Prices are firming up this morning and we are making new five-year highs.
The reprieve this week was nothing more than a buying boycott. Asset Managers pulled bids so that they could gauge the selling pressure. Volumes were light and the absence of profit taking gave them the “green light” to buy stocks.
I’ve been mentioning all week that this is nothing more than normal consolidation. The market needed to gather strength for its next run.
The economic releases this week have been positive on a global basis. Earnings season is winding down and Asset Managers believe that we are coming out of a trough.
We are entering a news vacuum next week. All of the major releases are out-of-the-way and China’s market is closed to celebrate the New Year. The highlight of the week is the State of the Union Address. President Obama will beat up Republicans and they will fire back in their rebuttal. The tone will be negative and it could spook investors.
The sequestration is a few weeks away and it is laden with defense spending cuts. I believe Republicans will try to negotiate and the reductions will not be as deep as feared. The market will give DC the benefit of the doubt and we still have a few weeks before it is an issue.
Credit concerns are minimal, option implied volatilities are low, global economic conditions are improving, earnings have been decent, central banks are printing money, corporate balance sheets are strong, the debt ceiling has been extended and stock valuations are attractive.
Shorts will not stand in the way of this freight train and I don’t see any obstacles ahead.
Dark clouds can roll up very quickly, but I see smooth sailing for a few weeks.
Stay the course and look for stocks that are breaking through horizontal resistance on strong volume. Buy calls and ride the momentum. When it stalls, take profits.
The market shot higher on the open and it has stalled. A major storm is going to hit the East Coast and traders will leave early. There is no sense in loading up ahead of the weekend and I believe trading volumes will decline late in the day.
I don’t believe we will see a big push higher although anything is possible when volume dries up.
Look for a choppy grind higher next week.