Lots of Events and Releases – The Outcomes Are Predictable. SPY Is Breaking Out

February 28, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

The news front is very quiet again today and that favors the bulls. There are a number of events and economic releases this week. However, the outcomes are fairly predictable and the “surprise factor” is low.

Tomorrow, the ECB will release the results of its LTRO (liquidity injection). Most analysts believe that European banks have borrowed $500 billion during the second round. This maneuver has pacified credit concerns and it has been the biggest catalyst for the current market rally.

Eurocrats will hold a summit Thursday and Friday. They will discuss funding the IMF to form a “firewall”. They were also supposed to draft fiscal policy rules for the entire EU. Now that interest rates have pulled back and the pressure is off, they will drag their feet. If they do reach an agreement this year, it will be a watered down solution that accomplishes nothing. The austerity timelines will be off in the distant future and sovereigns will continue to plunge further into debt.

Asia and Europe will release official PMI’s on Thursday. The flash numbers last week were in line and the market won’t have much of a reaction.

This morning durable goods orders fell 4%. That was worse than expected, but this number is very volatile on a month-to-month basis. Consumer Confidence came in better than expected. Domestic economic releases this week include GDP, Chicago PMI, the Beige Book, initial claims, ISM manufacturing and construction spending. The numbers should be decent and the market will be able to grind higher.

Chairman Bernanke will testify before the House tomorrow. It will be filled with political posturing as usual and the market impact will be negligible.

Earnings season has ended and investors are satisfied with the results. Profit growth slowed to its lowest level in two years. However, corporate balance sheets are strong and stock valuations are attractive at a forward P/E of 14.

With each passing day, Asset Managers that are under allocated grow more concerned. They have been waiting for a pullback and it does not look like they will get one. If the market punches through resistance at SPY 137, they will aggressively load up.

Employment in the US has been improving. Initial jobless claims continue to decline each week and that bodes well for the Unemployment Report next week.

I don’t see any bumps in the road for the next two weeks and the market should be able to march higher.

Buy calls on strong stocks that are near the top of the Live Update table and hedge your positions by buying puts on weak stocks at the top of the Live Update table. Use a 3 to 1 ratio. Alternatively, you can buy VIX calls instead of puts to hedge your positions.

Option premiums are cheap and you should focus on buying strategies.

Look for a lackluster grind higher today.
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