Initial Jobless Claims Continue To Improve. Look For An Afternoon Rally.

May 9, 2013

The market broke out to a new all-time high and we saw follow-through buying on light volume this week. Earnings season is winding down and major economic releases are a week away. Momentum should push stocks higher.

This morning, initial jobless claims fell another 4,000. The four-week moving average continues to decline and traders have proof that April’s soft patch was a seasonal adjustment. Until they see concrete evidence that economic conditions are deteriorating, they will buy stocks.

There were some positive developments this week. China’s trade balance came in better-than-expected. Slowdown fears will be kept at bay until major releases hit next week (industrial production and retail sales).

Germany’s Finance Minister did a 180 this week and his perspective has changed in the last year. He now supports a centralized banking authority in Europe (ECB) and he wants to move quickly. European credit concerns plagued the market the last two years and steady progress will keep PIIGS yields low.

The US debt ceiling has not been much of an issue since the Treasury has enough money to get through October. Republicans want a flat tax and as long as the rhetoric remains friendly, they might extend the debt ceiling. This removes another potential roadblock.

Central banks are printing money like mad and that has resulted in miniscule bond yields. The US 10-Year Treasury offers a negative real rate of return (inflation-adjusted) and it is lower than the dividend yield on the S&P 500. Asset Managers want to buy stocks. At a forward P/E of 15, they are still attractive.

Corporate balance sheets are strong and companies are using cash flow to repurchase shares. Year-over-year revenue comparisons are flat, but cost-cutting has preserved profit margins. Any uptick in demand will go right to the bottom line.

The market has broken out to new all-time high and it looks poised to grind higher.

I have been buying calls since the breakout and I have built to 25% of my normal position. I am actively day trading and I still want to keep my overnight risk exposure low. We can expect some consolidation over the next two weeks. The news is light and Memorial Day comes early. If this rally stalls, time decay will become an issue.

I suggest buying June call options. Focus on stocks that are breaking through horizontal resistance. If the momentum stalls, take profits and look for the next opportunity.

I believe you can trade the bullish side without the threat of a major decline. Now that we’ve broken out, support is at SPY $159.

We had a good number today and I am expecting and afternoon rally.
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