Daily Commentary: December 01, 2020

Jeremy Engelbrecht1Option Commentary

New All-time Market High – Wait Before You Buy – Watch For This

Posted by Pete Stolcers on December 01

The S&P 500 is poised to open at a new all-time high this morning. Three weeks ago we had a 150 point surge on exciting vaccine news and it has taken that long for us to retrace to that high. There are many cross-currents and we can expect profit-taking when the market gets ahead of itself. We can also expect buying when the market dips. Investors are ignoring the current spike in Coronavirus cases and they are focused on better times in Q1 when the vaccines will be broadly distributed. My market bias is neutral to slightly bullish.

Gaps up to a new relative high must be treated with caution. The move three weeks ago reversed completely. Tread cautiously on the open and make sure that buyers are engaged. If we are going to see a gap reversal, the signs of selling pressure will be visible in the first hour of trading. If we get through the open with most of the gains preserved we will grind higher.

On the positive side of the ledger we have pent up demand that will be unleashed in Q1 when the virus is contained. The Fed will remain extremely dovish and Biden has selected Janet Yellen (dove) as his Treasury Secretary. There will not be an interest rate hike for at least a year and bond yields don’t keep pace with inflation (negative real returns). This makes stocks attractive on a relative basis. Furthermore, corporations are issuing cheap debt and they are using the proceeds to repurchase shares. These are incredibly powerful forces and investors are willing to ride out this rough patch.

On the negative side of the ledger, stock valuations are rich and the S&P 500 P/E is 40. It will take time for profits to catch up and good news is priced in. We have a budget deal/debt ceiling that needs to be negotiated in 2 weeks and this will come down to the wire. Both parties are interested in a stimulus bill, but they aren’t talking. The Senate runoff in Georgia will happen in January and a Democrat when would likely lead to a repeal of the Trump tax cuts (bearish). States are shutting down due to the virus and that will weigh on economic data points. Last week we saw initial jobless claims tick higher. This is a big week for economic releases and we will get ISM manufacturing today. ADP will be posted Wednesday, ISM services will be posted Thursday and the Unemployment Report will be released Friday. I’m expecting soft numbers, but not disastrous.

Swing traders are long 1/2 position of SPY at $360. We will hold without a stop or a target. We have been aggressively selling out of the money bullish put spreads. Three positions maxed out (expired worthless) last week and we have seven positions on currently. This strategy allows us to distance ourselves from the action and to take advantage of accelerated time decay. Our probability of success is extremely high and we’ve only had a few losers in 2020. Option Stalker finds stocks with heavy volume, relative strength and technical breakouts. We are selling spreads that expire in three weeks or less and our short strike price is below technical support. We want accelerated time premium decay to work in our favor and a short-term trade horizon allows us to continuously monitor market conditions.

Day traders need to be cautious on the open this morning. Make sure that the bid is strong before you buy. Opening gaps higher are my least favorite day trading set up. Relative strength is much harder to spot since all stocks jump on the open. We need to make sure that the bid is strong so we can’t aggressively buy the open. Often times we miss a surge higher and by the time we are ready to join the rally it has run its course. This is frustrating, but at least we are not trapped by a gap reversal where the rug gets pulled out from under us. This morning I believe that the bid will be checked and we will see a small pullback to SPY $364. That was the previous high and if that support holds we can start buying stocks with relative strength. During the initial dip we will use Relative Strength 30 as our go to search in Option Stalker. These stocks will prove that they want to move higher and when the market finds support they will fly. This is our standard operating procedure and we have been killing it each day in the chat room.

Support is at SPY $364 and I believe resistance will be at approximately $367. Tread cautiously on the open and know that profit-taking is very possible. Don’t expect a runaway rally into year-end. This will be a three steps forward, two steps backwards process and there will be plenty of opportunities to get long.

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