Daily Commentary: December 29, 2020

Jeremy Engelbrecht1Option Commentary

Crank Up the Printing Presses – More Helicopter Drops and A New Market High

Posted by Pete Stolcers on December 29

The S&P 500 will make a new all-time high this morning. President Trump signed the stimulus bill and there is a chance that the stimulus checks could be increased by Congress. England and the EU have a Brexit deal, but there are still many issues that need to be addressed. The market has the news it needs to make a new all-time high this week. There are a number of warning signs and investors should be cautious.

The new stimulus proposal (CASH Act) that still needs Senate approval would increase payments to $2,000 for each dependent so a family of 4 would receive $8,000 if they qualify. This new proposal would cost $464 billion and the helicopter drops continue.

China’s holdings of US debt have been falling for 4 years. Instead for holding “funny money” they are buying up physical assets. Did you know that China owns 65% of the world’s largest 50 container ports including LA and Seattle?

Who cares – right? Crank up the printing presses. Full steam ahead!

Margin debt levels on a dollar basis hit a new all-time high according to FINRA. Investors are borrowing money to purchase stocks and they are vulnerable to market pullbacks. The VIX measures option implied volatilities and it is also known as the “fear index”. It is near historic lows suggesting complacency. Bullish sentiment indicators are extremely high and the S&P 500 is riding the upper boundary of the Bollinger Band. From a valuation standpoint, the S&P 500 is trading at a P/E of 40 and that is extremely high. These are all potential warning signs.

The Coronavirus is spreading and the vaccines are being distributed. Most analysts agree that it will take at least a few months for the vaccines to impact the number of new cases.

This year the S&P 500 is up 15.6%, the Dow is up 6.5% and the Nasdaq is up 43%. This reminds me of the Y2K “tech bubble”, but if you shorted that rally too early you were carried out in a body bag and you missed some incredible upside.

The market can stay overbought for a very long period of time before it corrects. It is foolish to pick tops so don’t buy puts. The last leg of this rally could be particularly strong and we could see a “blow off”. The upward sloping channel for the S&P 500 started two months ago and a breakout through the upper end of the trading channel is the type of buying climax I’ll be watching for. A big “blow off” rally followed by an immediate reversal with long red candles closing on their low would present a shorting opportunity. Don’t jump the gun, this pattern might not even materialize.

Swing traders should passively sell out of the money bullish put spreads on strong stocks. Sell spreads that expire in three weeks or less and take advantage of accelerated time premium decay. Increase your odds of success by selling spreads below major technical support levels. This options trading strategy allows you to generate income and to distance yourself from the action. We only have one open position and it will expire Thursday. This trade will conclude a very successful year and we will start from square one in 2021.

Day traders should be cautious on the open. Gaps higher have been faded so don’t chase. Wait for a pause or a pullback before you buy. Seasonal strength will be in play this week so you should favor the long side. Focus on stocks with heavy volume and relative strength. The new Option Stalker HA Continuation II search is excellent when combined with other short-term variables. I will trim my trade count and my size this week.

Support is at SPY $367.50 and resistance is at $377.

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