Daily Commentary: February 04, 2021

Jeremy Engelbrecht1Option Commentary

Buy A Half Position In SPY Today – Then Add At These Levels

Posted by Pete Stolcers on February 04

The market showed its strength this week. After a round of profit-taking last week we saw buyers gobble up shares Monday and the gains this week have not been given back. That price action suggests that we will make a new market high very shortly. The S&P 500 is up 10 points before the open and we are within striking distance of the all-time high.

The economic data has been strong this week even though states have had to shut down because of the virus. ISM manufacturing, ISM services and ADP all reported strong numbers. This morning, initial jobless claims declined and all of this will bode well for tomorrow’s Unemployment Report. Typically, good news would be bad news. When economic activity strengthens the Fed tightens. They have signaled that lose money policies will remain well through 2022. This is the best of both world’s.

Democrats control Congress and the White House and they are going to push through a stimulus bill. The consensus is that they will go “big” and that they will move forward with or without Republicans. All of this money sloshing around has to go somewhere and it’s likely to find its way into the market.

Retail investors are “all in”. We know that from the short squeezes last week and from record margin borrowing. Option implied volatilities spiked for a couple of days last week and they were hammered this week. That is a sign that confidence is high and the perceived risk of a market decline is low.

Earnings season has been good and the tech giants did not disappoint. Valuations are rich, but the economy is showing signs of strength and we have a likely stimulus bill that will be passed in the next few weeks. Add a dovish Fed to the mix you have all of the ingredients you need for a market melt-up.

Swing traders should buy 1/2 position of SPY on the open today. The immediate snapback rally this week signals higher prices. If the S&P 500 breaks through the all-time high add the other half. If the market makes a new high this week I will consider buying call options. Option implied volatilities are cheap and cyclical stocks should start to move higher as economic activity rebounds. I also like selling out of the money bullish put spreads below technical support on stocks that have relative strength and heavy volume. If the market pulls back we will also add the other half at SPY $377.

Day traders should focus on the long side. Wait for the market to come in a little bit and then buy stocks with relative strength. Given the price action that I’ve seen so far this week I believe that buyers are completely in control. After a swift run up this week we could pause for a few days, but the buying should resume soon.

Support is at $381 and $377. Resistance is at $383.50 and the all-time high.

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