The market staged an impressive reversal yesterday that resulted in a new all-time high for the S&P 500. Stocks opened on a soft note and buyers were engaged the entire day. There is not any incremental overnight news and seasonal strength is fueling this rally. Stock valuations are very rich and this is a good time to take some chips off of the table.

The Coronavirus is spreading quickly and states are shutting down. This will impact economic activity until vaccines are distributed in Q1. It’s still unknown what percentage of the population will opt to take the vaccine even when it’s available. There are new developments on this front every day and China has a vaccine that is 86% effective (not approved yet).

Politicians are discussing a $900 billion stimulus plan that would increase unemployment benefits ($300/week) and provide aid to struggling businesses. Democrats want more aid to states and Republicans want to limit virus liability for business owners.

Boris Johnson will meet with the EU today in a last-ditch effort to avoid a “hard exit”. If the deal cannot be reached this could disrupt currency markets and commerce.

Domestic economic numbers do not suggest that we are falling off of a cliff. ISM manufacturing and ISM services were very healthy data points last week. The jobs numbers last week were soft and the virus is starting to take its toll.

At a current P/E of 40, stocks are very rich.

The Senate runoff in Georgia is another possible issue for the market in January. A Democrat win would result in a repeal of the Trump tax cuts (bearish for the market).

Swing traders should manage profits on existing bullish put spread positions. These trades are out of the money and time decay is eating away at them each day. Monday we took profits on our SPY position and we are reducing risk. The S&P 500 daily ranges are half of what they were a month ago and option implied volatilities as measured by VIX are collapsing. Bullish sentiment is extremely high and the S&P 500 is riding the upper boundary of the 20-day Bollinger Band. These are all warning signs and I believe that the market is due for a normal dip within a bull market rally. Selling out of the money bullish put spreads is dangerous at current levels because a small market whiff would send the stock below the short strike price. We don’t want to be managing losing positions; we want to be looking for opportunities on that dip.

Day traders should focus on stocks with heavy volume that are breaking through technical resistance and that have relative strength. We’ve been able to find these stocks each day in the chat room and Heavy Buying is one of my favorite Option Stalker searches right out of the gate. On any market dip I turn to Relative Strength 30. If the market is above the low of the day after two hours of trading, assume that we are going to float higher and focus on the long side. I am expecting tighter daily ranges the rest of the year and you should consider trimming your size and trade count if we are trapped inside of the first hour range.

Support is at SPY $367.50 and resistance is at the all-time high. If the market breaks out I believe it could reach $373 before profit taking sets in.

Take profits and reduce risk into this strength. There are no bargains at this level.