New Relative Highs and Positive Economic Data Ahead – Stay Bullish!

August 21, 2009
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market was able to overcome early weakness after initial jobless claims came in worse than expected. For the third day in a row, the market reversed from a lower open and rallied throughout the day. Our market decline on Monday followed a massive selloff in China. The savior for the global economy was under fire and their market had fallen 20% in 2 weeks. Traders soon realized that their market was vulnerable to a pullback after it had rallied 80% in seven months. By comparison, our market has rallied half as much. Tuesday and Wednesday global markets recovered and yesterday, the Chinese market was up 5%. Shorts who were calling for a market top have once again been punched in the mouth. Traders gradually put money to work throughout the course of the week and as they did so, option expiration became a factor. As the market recovered, traders legged out of hedged positions and they "goosed" the market. That was very apparent yesterday near the close and this morning after the open. The market was poised to open higher, but existing home sales rose 7% and that fueled the rally. They posted their best gain since August 2007. Home prices have fallen and interest rates have pulled back. This has set up a perfect buying opportunity and first-time homebuyers are taking advantage of an $8000 tax credit before it expires in November. As I've been saying throughout the week, you have to be bullish at this juncture. From a technical perspective, we have broken above the neckline of a long-term inverted head and shoulders formation, we have broken above the downtrend line that dates back more than a year and the market tested the 200 day moving average and quickly rallied from that level. This week we did not even get close to testing support at SPY 96 before buyers stepped in. From a fundamental perspective, earnings have been solid and 70% of all companies have exceeded expectations. Interest rates are low and the Fed extended the timeline for quantitative easing. The unemployment rate dipped and initial jobless claims are improving on a 4-week basis. Inflation is not a concern and interest rates are not under pressure. Economic data is "less bad" and investors sense that the worst is over. The market is making a new relative high. In light volume trading it has room to run. Earnings season has ended and next week there are only two major economic releases – durable goods and GDP. Durable goods orders declined last month and that should reverse this month. The cash for clunkers program has been extremely successful and that will be reflected in next week's results. The next iteration of Q2 GDP will be released next week and the improvement from Q1 to Q2 was dramatic. Both numbers will cater to the "less bad" camp and they should be well received by the market. Bears have been declawed and they dare not stand in front of this freight train. Light trading should continue for another three weeks and choppy action should be expected. There will be a bullish bias. As we approach a seasonally weak period for the market, I prefer to play it safe. I have been selling out of the money put credit spreads on strong stocks and those positions will expire profitably today. The decline on Monday reminded me why I like this strategy. I was a safe distance from the action Monday and I did not have to give my trades a second thought. Next week, I will be looking for new put selling opportunities. I will enter a few positions early just to get the ball rolling, but I would prefer to add on a pullback. This is a "buy the dip" market. For today, most of the news is out of the way and option expiration has run its course. There is a chance for a small expiration related rally into the closing bell (just a few points). Stay bullish and keep your distance. image

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