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2020 Market Forecast With Stock Picks - Take Profits Into This Year-End Rally

Posted by Pete Stolcers on December 30, 2019

Posted 9:30 AM ET – PRE-OPEN MARKET COMMENTS MONDAY – The market has been gradually drifting higher on light holiday volume. No one is standing in the way of seasonal strength and stocks are poised to finish the decade on their high. Prices are little rich at a forward P/E of 18 and it will take time for them to grow into these valuations. I expect to see some profit-taking in the next week or two.

We are still in a news vacuum and New Year’s will disrupt the week. Official PMI’s will be posted along with ISM manufacturing and the FOMC minutes later this week. The Unemployment Report will not be posted until January 10th. I’m not expecting any big surprises out of the numbers this week and they should be generally positive.

Earnings season is only a few weeks away. The expectations are high and we will see if current valuations are “stretched”.

The Phase 1 deal with China, the USMCA, Brexit and an accommodative Fed will keep buyers engaged. Asset Managers will not aggressively buy stocks at a forward P/E of 18, but they will add on pullbacks.

Swing traders should have sold the SPY when it traded above $324 last Friday. That print did not happen during normal market hours and I realize that some of you might still be long. Use SPY $322 as an intraday stop and exit the position on the close today. We are long from the $313.80 level and I don’t want these profits to slip away. You should also have a limited number of bullish put spreads on. Most of our spreads expired (maximum profit) a week ago and if you followed my advice you did not roll those positions. I will be 90% in cash by the close Tuesday.

To be clear, I am not looking for a massive market decline. I am looking for a quick round of profit-taking that could push us down to SPY $316. Once support is established I will sell bullish put spreads. The VXX will finish the year on its low and option premiums are tiny. The market has gradually drifted higher and volatility has collapsed. Typically, this is a warning sign. From a technical perspective the S&P 500 has broken through the upper end of the trading channel on a daily, a weekly and a monthly basis. After a 29% run this year we are due for a pullback and I believe that will lead to a trading range for most of the year.

2020 MARKET FORECAST VIDEO WITH STOCK PICKS

I’m waiting for a small drop in the next two weeks followed by a bounce that will try to challenge the all-time high. Unfortunately, I believe that profit-taking will surface before we get back to the all-time high and that will be a sign that resistance is forming. The next wave of selling after that lower high will be a little more pronounced and it could come in February after mega cap tech companies have reported. That market drop is likely to define the lower end of the trading range for the next six months and we will visit both ends of that range.

Interest rates are at historic lows and investors are forced to own equities to generate a reasonable return. Bond yields don’t keep pace with inflation so fixed income investments have a negative real rate of return. A strong market bid means that volatility will be fairly minimal. Low interest rates also allow corporations to issue debt at very favorable prices. They are using the proceeds to repurchase shares and that will also strengthen the bid. On a swing basis we will rely more on timing. We made fantastic money in 2019 and we will wait patiently on the sidelines at the start of 2020. When we get the pullback I expect, we will reload.

Day trading will be tough the rest of the week. Intraday ranges will be tight, but we could see some “year-end window dressing”. Option Stalker searches like Heavy Buying and Relative Strength 30 will help us identify rotation. Favor the long side for the next two days and watch for late day selling. I believe that in the next two weeks we will start to see some excellent intraday shorting opportunities. Stocks are over-extended and the downward price action on some of these names will be very steady intraday. I don’t plan on holding many (if any) overnight shorts.

Enjoy the last leg of this rally and take profits into strength. Keep your powder dry and prepare to reload on a market pullback.
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