S&P 500 About To Make A New All-time High. Keep Scaling Into May Calls

March 14, 2013

The S&P 500 is a few points away from making an all-time high. All of the puzzle pieces are in place and a breakout is imminent.

Asset Managers have been waiting for a pullback and they are not going to get one. The closest we came was a one day event (300 point decline in the Dow) and stocks immediately rebounded. That type of price action is a sign of strength.

European credit concerns are low. Italian bond yields are inching higher due to political uncertainty, but that has not spread to Spain. They held a successful overnight auction and PIIGS yields are stable. The ECB will continue to print money and the notion of a centralized banking authority will keep credit concerns at bay.

Economic conditions in Europe are dire. That is already priced in and any surprise favors the upside. Next week we will get flash PMI’s.

China’s flash PMI will be important. The PBOC has been removing liquidity and economic conditions have not grown as quickly as many would like. China is still on pace to grow 8% this year and I don’t believe this soft patch will spoil our rally.

Domestic economic releases have been stellar. This morning, initial jobless claims declined by 10,000 and employment conditions continue to improve. ISM manufacturing and ISM services were both strong last week. Economic activity is improving, but it is far from robust. We don’t need to worry about the Fed for many months.

Republicans and Democrats drafted budgets. They are miles apart, but at least we have a starting point. The rhetoric has been relatively tame and the market will give politicians the benefit of the doubt just as it did in December and February. The debt ceiling is still weeks away and it won’t be a factor until May.

Improving economic conditions will prompt analysts to raise earnings estimates for Q1. The bid will strengthen with each passing week and we will rally into earnings season (April 8th).

FedEx will post its results next Wednesday. It is considered an economic barometer and the guidance will be important. I am expecting sluggish conditions in Europe, stable growth in China and increased activity in the US. There will be more positives than negatives.

The market has all of the ammunition it needs to move higher, the missing ingredient is time. Asset Managers will get anxious when they don’t get the 5% pullback they are looking for. As the market makes new highs and as earnings season approaches, they will get more aggressive.

I’ve been telling you to gradually scale into May call positions. These narrow trading ranges erode time premium and that is why we are going out to May. Those calls also span earnings season so they will retain their implied volatility. I currently have 35% of my desired position and I will add next week. I will probably get to 50%. My positions are already showing a nice profit and I have some cushion.

While I wait, I am also taking advantage of day trading opportunities. Look for stocks that are in an uptrend and are breaking through horizontal resistance on strong volume.

Stay bullish and be prudent. Know that swift one-day selloffs are possible. The underlying bid is strong and you should view those dips as an opportunity, not a threat.
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