Keep Adding To Longs – Don’t Chase. The Debt Ceiling Extension Is A Big Deal

January 24, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

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The market is making new five-year highs each day and the news keeps getting better. Economic releases have been good and the House voted to extend the debt ceiling until May. Asset Managers are rotating out of fixed income and into equities.

Flash PMI’s in China were better than expected and they improved during the last month. Europe’s number was weak by traditional standards, but it was the best in 10 months. Domestically, initial jobless claims declined by 5,000. This is the best level in the last five years and that bodes well for next week’s Unemployment Report.

Republicans are not going to hold the debt ceiling hostage. The risks are too high and they will focus on spending cuts and the fiscal budget. The deadline has been pushed back to May and this proposal should get Senate/Presidential approval. The “can” has been kicked down the road. The remaining dark cloud has parted and the market will grind higher.

Earnings season is in full bloom and the results are decent. Revenues are flat and profits have been preserved through cost-cutting. Any uptick in revenues will go straight to the bottom line.

Bond yields are at historic lows and Asset Managers are anxious to rotate out of fixed income and into equities. European credit concerns are subdued and US banks have beefed up balance sheets. Credit spreads are falling and the risk profile is improving.

Shorts will not stand in the way of this freight train. Asset Managers have more and more information with each earnings release and the bid is strengthening. Some of them are under-allocated and they are scrambling to get long.

If you have been following my advice, you are making money. Continue to scale into call positions. This rally still has room to run.

For the first time in five years, I don’t see much that can stand in the way of this move. Option implied volatilities are at historic lows and the confidence level is high. I don’t view the low VIX as a contrary indicator because this condition can exist for a long time.

Ideally, the market will grind higher. We don’t want to see explosive moves because that will lead to profit taking and volatility.

Buy calls.
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