Posted 9:30 AM ET – The market has formed support and the FOMC statement is behind us. Earnings season is in high gear and that will be the focus for the next two weeks. This is a bottoming process and the market is forming support. The price action Friday tells me we are moving higher.
From a fundamental standpoint, money has to go somewhere and there is a ton of it out there after all of this money printing. Bond yields are still at historic lows and fixed income is producing negative real returns (yield – inflation < 0%). Where is all of that money going to go? Corporations continue to buy back shares aggressively. They are selling cheap debt (bond offerings) and they are using the proceeds to buy back shares. AAPL has repurchased 25% of its shares outstanding in the last 5 years. More cash from money printing, few alternative investments and less shares to buy = higher prices. These are incredible forces. My thesis is that the market is going to establish a range this year and it will spend time in that range while earnings/valuations catch up. I believe we are currently at what will be the low end of the range and this is where I want to start buying.The FOMC press conference was in line with expectations and we can expect a rate hike in March (.25%). Even if interest rates increase 1% this year, they are still near historic lows and this is accommodative. Here is a major “tell” that tells me the selling pressure will remain steady for the next week. After a major event like the FOMC statement we typically see option implied volatilities (VIX) contract. The news is out and that “uncertainty” is gone. Institutions have been selling volatility aggressively the last few years because the Fed (through loose monetary policy) has provided market support (Fed put). By historical measures the Fed is still very accommodative and the VIX should have dropped after the statement, but it didn’t. Yesterday when the market rallied early in the day VIX should have been crushed and it wasn’t. Asset Managers still see danger ahead and they are buying protection (long VIX or long puts) and that is driving up option premiums. This is a short-term bearish sign.Over one-third of the S&P 500 companies have reported earnings. In aggregate the “beats” are down year-over-year, but above the 5-year averages. EPS are up 24.3% and that is better than expected (21.4%) and revenue has grown 13.9%. Of the companies that have reported 77% have beaten EPS expectations and that is above the 5-year average (76%). More than three-quarters of companies beat on the top line and that is also better than the 5-year average (68%). These numbers are from FactSet. This will be a busy week for earnings releases (GOOG Tues, FB Wed, AMZN Thurs).Swing traders should buy the other ½ position in SPY on the open. I liked the price action Friday and I feel that any dip on the open will quickly find support today. Might we still see some after-shocks and retracement? Sure. I feel that support has formed and the probability of SPY testing the 100-day MA before it tests the low from Jan 24th is 3:1. Swing traders should sell out of the money bullish put spreads on stocks with strong technical support. Sell the bullish put spreads below that support. This strategy will provide cushion and the stock/market can move around. You will be taking advantage of higher option IVs and accelerated time decay. You will need to add these spreads progressively because the market will not stay at this level very long. Make sure they expire before earnings announcements and when possible sell them on stocks that have reacted positively to earnings releases. We want support at SPY $430 to hold. Day traders look for opportunities to buy this morning. We will start the day with a bearish 1OP cross. I would like to see a bit of this bearish cycle, but given the strength Friday, we could go right into a bullish divergence. Any time that we have to evaluate the open is a gift. My least favorite set-up would be a gap down and then long green candles stacked consecutively with little overlap. That would force me to blindly get long because of my market bias (I call this buying stupid). From this deep level we could lift off. This is my least favorite day trading set-up because I like to calmly evaluate price action and it would force me to take action right away. I would prefer a compression while 1OP drops. That would buy me time to evaluate stocks and I can watch for a possible bullish divergence. It will give me time to scale in. The ideal scenario is a choppy drop with mixed overlapping candles that retraces some of the gains from Friday. That move will allow me to find relative strength easier because the stocks that are poised to run will hold steady or move higher during the market dip. That type of choppy move lower would also give me time to evaluate VIX/UVXY. I want it to reluctantly move higher during any market decline like someone is sitting on its chest. That type of price movement in UVXY would confirm that institutions are selling “volatility” (bullish for the market). During any retracement I don’t want SPY to get below $438. The smaller the retracement this morning the more bullish I am. Overseas markets were generally strong.Support is at $432 and $438. Resistance is at the 200-day MA and $444. . .