Daily Commentary: December 07, 2020

Jeremy Engelbrecht1Option Commentary

Market Speedbump Ahead – Do Not Add To Bullish Positions – Here’s Why

Posted by Pete Stolcers on December 07

The S&P 500 finished the week at a new all-time high. Seasonal strength and hopes of a stimulus bill are fueling the rally, but there are warning signs. I believe that the market will probe for support this week and I would not add to bullish positions. Wait for a dip and make sure that support holds before you buy.

From a fundamental standpoint there are a number of concerns. Bullish sentiment is extremely high, the S&P 500 is trading at a forward P/E of 40, employment starting to decline and the stimulus bill is half of what was discussed before the election. The Coronavirus is spreading rapidly and the FDA has been slow to approve the vaccines. Additionally, Pfizer is running into logistical problems and it will only be able to distribute half as many vaccines as originally planned.

From a technical standpoint there are also concerns. The S&P 500 has broken through the upper trend line and that typically suggests a buying climax. The candles on a daily chart are tiny and that is a sign of resistance. Trading volume has been decreasing and the S&P 500 is touching the upper boundary of the 20-day Bollinger Band. This rally can be characterized as three steps forwards and two steps backwards. We have just taken three steps forwards and I believe we are due for a pullback to SPY $360.

There wasn’t much news over the weekend, but one data point did catch my attention. China’s exports in November were up 21% from a year ago and imports increased by 4.5%. This is a positive sign.

It’s important to note that I am not bearish. I would STRONGLY DISCOURAGE buying puts or selling out of the money call spreads. This will just be a natural pullback in an upward trend. A stimulus bill or other positive news could destroy bearish positions in a heartbeat. The best strategy is to patiently wait for a pullback.

Swing traders should sell the position of SPY on the open today that we purchased at $360 – we have a nice little profit. Do not sell any new bullish put spreads, manage your current positions. Most of our spreads are safely out of the money and time decay is working its magic. We don’t want to get overly aggressive with our bullish trades and we don’t want to chase.

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