One Bad Apple Won’t Spoil The Whole Bunch. Market Will Grind Higher – Buy Calls

January 25, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

The market is resilient and it was able to shake off a $50 sell-off in Apple yesterday. Tech stocks in general have been soft. Fortunately, the backdrop is very bullish and the market continues to grind higher. I expect to see choppy price action with an upward bias.

Politicians have kicked the “can” down the road and we won’t have to deal with the debt ceiling for a few months. Spending cuts and the fiscal budget will produce heated rhetoric, but the market won’t have to worry about default. This was the last remaining dark cloud.

European credit concerns are gone, US bank balance sheets are strong, credit spreads are declining and central banks are printing money like mad. This greatly reduces the risk profile and option implied volatilities are near historic lows.

Economic conditions are improving globally. China’s growth projections have been raised and GDP is expected to top 8% this year. Europe is struggling, but it posted its best flash PMI in 10 months yesterday. Domestically, initial jobless claims fell to a five-year low and that bodes well for next week’s Unemployment Report.

Bond yields are at historic lows and Asset Managers will rotate out of bonds and into equities. The dividend yield on the S&P 500 is greater than the yield on 10-year US Treasuries. Stocks are trading at a forward P/E of 14 and they have plenty of room to run.

Balance sheets are strong and so are cash flows. Cost-cutting has preserved profit margins and any uptick in revenues will go straight to the bottom line. If analysts forecast an economic recovery, money will flow into the stock market.

The current earnings cycle is not impressive. Revenues are flat and profit growth has slowed. Many analysts believe that Q4 represents a trough and that conditions are about to improve.

With every earnings release, Asset Managers will be armed more information. The bid will continue to strengthen and we can expect a choppy grind higher.

We hit a small soft patch yesterday and stocks feel like they want to move higher today.

Buy calls.
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