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Strong Jobs Reports Will Trump FOMC. Buy Calls On Dips. Looks For Horizontal Breakouts

Posted by Pete Stolcers on January 28, 2013

Last week the market continued its march higher. The macro backdrop is very strong and I don’t see anything that will stand in the way of this rally.

The EU has agreed to establish a centralized banking authority and the ECB is printing money like mad. PIIGS yields have plunged and recent bond auctions have gone well. Credit spreads are tightening and we are in “risk on” mode.

Option implied volatilities are at historic lows and the debt ceiling has been extended until May. All of the dark clouds that kept a lid on the market have parted.

Economic conditions in China are improving and the new leadership will keep its foot on the gas pedal. Analysts are upgrading their projections for GDP growth in 2013 and it should surpass 8%.

Europe is in recession, but the flash PMI last week was the best in 10 months. Any surprise favors the upside.

Domestic activity is also improving. Initial jobless claims fell 37,000 two weeks ago and another 5,000 last week. This is the lowest level we’ve seen in five years and it bodes well for the jobs numbers this week. ADP has been “overshooting” the Unemployment Report and it will be released Wednesday. The market will like the news.

Wednesday afternoon, the FOMC will release its statement. That could be the only bump in the road this week. Traders are worried about the great “unwind” that will take place in the future when the Fed reverses its quantitative easing. That won’t happen for many months, but the smart money will start posturing way ahead of time. We could see a pop in interest rates, but they have a long way to go before they are problematic.

Friday’s Unemployment Report will be good and the market will grind higher. Asset Managers have more information with each earnings release and the bid will strengthen. Those who are under-allocated will snap up stocks on weakness. That means that dips will be brief and shallow.

Earnings have been decent and stocks are attractively valued relative to bonds. Money will continue to rotate out of fixed income and into equities.

Look for stocks that are in an uptrend and have pulled back to support. I am buying them after a strong earnings report and I particularly like stocks that are breaking through horizontal resistance. These trades tend to produce sustained moves that last at least a few days and in some cases the rally continues for more than a week.

We are seeing a pattern where stocks open soft and the bid strengthens throughout the day. This is a very bullish pattern.

Buy calls. I am not looking for a melt up so don’t bet the farm. Prudently scale into bullish positions and take some chips off of the table when you have a nice run.
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