Stay Long and Stay Small. Gradually Build May Call Positions. Bid Will Strengthen Each Week.

March 13, 2013

Yesterday, stocks took a breather. China’s industrial production was a little light and after a big market run-up last week, traders did not have any compelling reasons to buy. The news will be very light this week and that should favor momentum.

Asset Managers pulled bids and we probed for support most of the day Tuesday. The selling was very contained and the SPY recovered most of its losses by the end of the day.

Industrial production in the EU was dismal, but that is factored in. Any economic surprise favors the upside. Italy’s bond auction did not go well and yields are creeping higher. Political uncertainty is the cause and interest rates in Spain remain stable. Bad news is priced in and I don’t feel that Europe will stand in the way of this rally.

China’s numbers have been a little weak and their market is unchanged for the year. The PBOC has been removing liquidity and that has some investors spooked. Analysts still believe their economy will grow at a rate of 8% in 2013 and I don’t believe this soft patch will stand in the way of our rally.

Democrats revealed their budget and as expected, the two parties are miles apart. It is rumored that a White House aide said last week’s GOP dinner was all PR. The market is relatively optimistic that DC will be able to find middle ground. If the tone gets ugly, this could be the source of the next shakeout. It probably won’t come until the 12th hour and that still gives us six weeks to work with.

Domestic economic conditions continue to improve. This morning, retail sales rose 1.1% and that was better than expected. This is not a strong number, but it does show gradual improvement. I am not remotely worried about the Fed and the end of quantitative easing.

Earnings estimates will be revised upwards. Next week, FedEx announces and it is considered an economic barometer. Transportation stocks have been strong and given recent economic growth, the guidance should be positive. It could spark a nice little rally.

As we get closer to earnings season, the bid will strengthen. The S&P 500 will make a new all-time high. Time is the key. I know I keep repeating this, but I can’t say it enough. We need to consolidate gains and build strength.

I have a decent call position (30%) and I plan to add. I am not in a hurry because I know time decay will erode the value of my calls while I wait. If we get a nice “pop”, I will participate via my calls and I can day trade the move. If conditions remain quiet, I will patiently wait for time to pass. In the next couple of weeks, I will get more aggressive with my call buying.

I am buying May options. Time decay will have a smaller impact if I buy longer-term options and they will retain IVs because they span earnings.

It looks like a quiet week. Have some overnight call positions, but don’t load up. If the market does grind higher on light volume, know that those gains could be stripped away very quickly just as they were February 20th. The five-day period preceding that decline was very similar to this week. We were in a news vacuum and momentum pushed the market higher on light volume.

Stay long and stay small.
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