Yesterday the market closed at a new all-time high and it is poking through the upper and of a trading channel. A blow-off rally looks likely. Negative news has been discounted and fundamentals don’t seem to matter. The market can be “irrational” for long periods of time and I would discourage buying puts. If you are long, take profits into strength and gradually scale out. I believe a buying climax is forming and there is still plenty of upside. The SPY could even reach $400 by the end of the month.

The Coronavirus is spreading and experts agree that the vaccinations won’t have a material impact for at least a few months and perhaps more. That means that a speedy economic recovery is not likely.

This week ADP reported that 123,000 jobs were lost in the private sector during the month of December and expectations were for 88,000 new jobs. ISM manufacturing and ISM services both beat expectations this week and that is a good sign since these are surveys (forward-looking). The Unemployment Report this morning showed that 140,000 jobs were lost during the month of December when analysts were expecting 112,000 new jobs. The S&P 500 barely flinched on the news. As long as the helicopter drops continue the market doesn’t care if people have jobs.

Democrats will control all three branches of government and $2000 stimulus checks are all but guaranteed. That instant liquidity injection is dominating the price action in my opinion. In aggregate there will be $1.4 trillion of stimulus on top of the $6 trillion that was spent six months ago.

Earnings season is about to begin and buyers are typically engaged ahead of these releases. At a P/E of 40, fantastic results are priced in. Banks will dominate the early scene and they have run higher on the stimulus news. Slow job growth and historically low interest rates would typically be bad for banking profits, but the stimulus checks will soften credit concerns. I feel the rally in the financial sector is particularly vulnerable. There are not any bargains at this level and I’m seeing many unprofitable companies with parabolic price movement.

When I mentioned that the market could remain “irrational” for long periods of time it reminds me of Fed Chairman Alan Greenspan’s comments in 1997. He said that the market was overvalued and that there was “irrational exuberance”. He was ultimately right, but the market rallied like crazy for three years and anyone who shorted stocks based on his observations was carried out in a body bag. I’m not saying that we will get a melt up that is anywhere near what we saw in the late 90s, but this certainly feels similar. If you are in alternative energy, electric cars, pot, human genome editing or crypto currencies your stock is skyrocketing. In the late 90s you just had to have ”.com” at the end of your name. There will be some fantastic winners, but many of these companies will not survive.

From a trading standpoint swing traders should passively sell out of the money bullish put spreads. Yesterday we were able to enter two of our swing trades from the Weekly Swing Trading Video and we are still trying to enter two of our other trades. Stock selection is critically important and swing traders should avoid stocks that have gone parabolic for this strategy. Those gains can reverse very quickly. We are taking advantage of historical price movement for companies that tend to rally into earnings announcements. Option Stalker finds stocks that have rallied more than 75% of the time once they are inside the two week window. This gives us a statistical edge on top of the technical analysis that we are already doing. We are selling these bullish put spreads below support and they will expire in three weeks or less. It’s important to sell spreads that expire before the earnings announcement date. Accelerated time premium decay is also working in our favor and these trades are set up to generate a 25% return per trade in less than three weeks. This strategy allows us to generate excellent returns while still remaining somewhat passive.

Day traders are nimble and this is a time to increase your size. Take advantage of the strong momentum and ride this breakout. I don’t buy market gaps to a new high. If it screams during the first hour I will miss most of the move and I’m okay with that. Most of the time gaps to a new all-time high giveback gains early in the day. If you are too aggressive you will enter poorly and you will be stopped out of most of your trades for a loss. That is why I don’t chase market gaps higher. When the market compresses after gapping higher or when it retreats I can evaluate relative strength and my odds of success increase dramatically. Even when the market screams higher without me I will have an opportunity later in the day. A classic example of this risk was seen Monday. If you bought that open, you regretted it. The S&P 500 reversed 100 points. Be patient and wait for your entry points to set up. If you have a particularly strong day trade and the stock is closing on its high, take some profits and leave some of the position on overnight. When you get a gap higher the next morning take your remaining profits. This strategy has worked well and I believe it will continue to perform well for the next couple of weeks.

Know that FOMO (fear of missing out) is driving this price action and that the macro backdrop does not support these price levels. Watch for signs of exhaustion and a technical breakdown on a short-term basis.

I feel the trading is a lot like fishing so I am going to give you an analogy. The fish bite the best just before a massive storm. If you pull up your anchor too soon, you’ll miss some of the best fishing ever. If you overstay your welcome, you could put your life in danger. Every fisherman has to decide how far they will push the limits and what risks they are willing to take.