Strong Economic News Is Supporting the Breakout. Rotation Out of Bonds and Into Stocks Continues

March 15, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

I promised yesterday that I would post a trade if I get 11 new reviews. We are still a few short of my goal. Please CLICK HERE to review my blog on Investimonials. For those of you that have reviewed my blog, I appreciate your kind comments and the time you spent writing them. This means a lot to me and it inspires me.

In the spirit of things, I will post the trade with the hope that I will get a few more reviews today. I like buying the MCD June $92.50 calls. The company said a week ago that sales increased 7.5% (7.7% expected). Horrible weather in Europe was to blame. This is a temporary condition and it will soon correct itself. MCD has been posting great results and 4% growth in Europe is still strong. The new menus have been popular and MCD has been leading this rally. Asset Managers are searching for bargains and they will scoop up shares. Yesterday, the market was flat and MCD showed signs of life. The stock is at horizontal support and it is just above the long term trendline (see chart). It is also above the 200-day MA. The stock does not make big moves, it grinds higher. I want to go in the money (high delta) and I want to give it plenty of time to work. If the stock closes below $96, stop the trade out – GTC. Take partial profits at $99.50 and sell the rest when the stock reaches $101.

This has been a great week for the market. The S&P 500 broke out to new multi-year highs on Tuesday and bulls clearly have the momentum.

The market started to grind higher Tuesday and the FOMC statement provided a catalyst. The Fed said that the employment recovery is well under way and economic conditions are improving. They also mentioned that energy prices could spark inflation.

Before Tuesday’s close, UBS accidentally released the results of its stress test. That news fueled a 15 point S&P 500 rally in the last hour of trading. Asset Managers who were under allocated scrambled to get long and panic buying set in.

The bank stress test evaluated 19 of the largest banks in the US. Its goal was to determine how many financial institutions would be able to survive depression like economic conditions. All but four of the banks passed the test and those that didn’t are still very sound.

Economic releases continue to be strong. The Unemployment Report, ISM manufacturing, GDP and Chicago PMI all exceeded estimates in recent weeks. This morning, initial claims fell by 14,000, confirming steady job growth. Empire Manufacturing and the Philly Fed both exceeded estimates and hit levels not seen in more than a year. The PPI came in a little “hot” at .4% and it was largely driven by oil prices.

Tomorrow, industrial production, CPI and consumer confidence will be released. These numbers should be “market friendly”.

China’s inflation dropped to its lowest level in years and the PBOC said that it will lower bank reserve requirements. This easing will put a bid under their market and commodity stocks should start to strengthen in coming months.

European banks gobbled up ECB loans and credit concerns are temporarily pacified. Sovereign bond auctions have gone well and Spain’s €3 billion sale had a bid to cover of 4. Out of all of the market “drivers”, this is by far the biggest.

I don’t see any speed bumps next week. The economic releases are fairly light. FedEx will post its results and it is considered an economic barometer. The transportation sector has lagged during this rally and this could be the news it needs.

Stock valuations are attractive and Asset Managers are rotating out of fixed income and into equities. Interest rates are starting to creep higher and from my perspective, that is a good sign.

I am long calls and I am not hedged. Each day I am evaluating my positions and I am ratcheting up my stops. I don’t believe we will get a surprise decline, but I want to be prepared.
The market still has a couple of good rallies left in it before the momentum stalls. As we approach SPY 145, I will start to take profits.

Look for a gradual grind higher throughout the day.
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