Posted 9:30 AM ET – The market is near the all-time high and gains will be hard fought from now until year end. Momentum and seasonal strength are keeping buyers engaged and the next potential speed bump is a few weeks off.
There is little news this week to drive the market. New home sales, GDP and durable goods orders are not likely to move the needle. The FOMC minutes Wednesday afternoon could spark some movement. This is going to be a dull week where momentum and seasonal strength fuel a gradual drift higher on light volume ahead of the holiday.
Earnings season was excellent, but valuations are at 20-year highs. Real bond yields (interest rate less inflation) are falling farther into negative territory and that makes stocks attractive on a relative basis. The system is flush with cash and Asset Managers, retail investors and corporations (in the form of share buy backs) are using that cash to buy stocks.
The next FOMC meeting is on December 15th and it is an important one. We can expect tapering and that could cause some nervous jitters before the release. The Fed does NOT want to tighten and I believe that any selling into that statement will provide an opportunity to sell out of the money bullish put spreads. That dip will lead to a year-end rally on light volume.
How will we know when the Fed is ready to tighten? Just watch the TLT. If you see bonds selling off, it is a sign that the institutions are preparing for higher inflation. That selling will push yields higher and it will force the Fed’s hand. As long as TLT stays above $140 you do not have to worry about Fed tightening.
Swing traders should focus on selling out of the money bullish put spreads that expire in 3 weeks or less. Find stocks that are breaking through technical resistance on heavy volume and sell the spreads below technical support. That support is your stop. A firm market bid plus a technically strong stock will make this options strategy work. You can distance yourself from the action and let accelerated time decay work in your favor. I like bullish put spreads that yield a 25% return.
Day traders need to be patient when the market gaps up. The red candles on the daily chart show that the market has been closing lower than the open. Translation: DON’T CHASE GAPS UP. There will be plenty of opportunities to get long during the day and there is no reason to “pay up” on the open. Thursday we had a bullish hammer and that paved the way for a possible market breakout on Friday with monthly options expiration. That did not happen and stocks were slapped down when resistance was tested. You might get one or two really good windows of opportunity during the day. Don’t expect big runs. You will not have much of a market tailwind. That means you have to set passive targets.
Support is at $462 and $466. Resistance is at $470