NEW DIRECTIONAL CALL PLAYS
SPDR S&P 500 ETF - SPY - close: 211.16 change: +0.53
Stop Loss: 206.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 128 million
Entry on April -- at $---.--
Listed on April 23, 2015
Time Frame: Exit PRIOR to June option expiration
New Positions: Yes, see below
Why We Like It:
It's hard to argue with a market that refuses to go down. When traders buy every dip it's a signal the market wants to go higher. The S&P 500 midcap ETF (MDY) just closed at an all-time high. The Russell 2000 index ETF (IWM) just closed less than half a point from a new all-time closing high. The NASDAQ composite index just set a new all-time closing high. Meanwhile the S&P 500 ETF (SPY) is on the verge of breaking out to a new all-time high.
I know there are skeptics out there who believe, for whatever reason, that the market should be headed lower. CNBC reporter Bob Pisani shared his thoughts on what the bears or at least the less bullish investors have been saying lately. (You can read Pisani's thoughts
at this link.)
You could argue that the S&P 500 has been in a trading range. Currently that's true with the S&P 500 churning between 2,040 and 2,120 the last several weeks. There is the complaint that there has been no volume. That's true as well but the market has been able to rally on less than ideal volume for years. Traders could argue there is no volatility - another truth. Right now it is earnings season and individual stocks are seeing some huge volatility as the market reacts to earnings results. Yet the major indices have not seen any volatility. The S&P 500 has gone more than 80 days without a 2% move.
Bears could argue that valuations on stocks are too high. The P/E ratio can tell you if a stock or market is expensive, cheap, or fairly valued compared to its historical average. On a short-term basis it's a terrible predictor of performance.
According to FactSet the current forward P/E of the S&P 500 is about 17. Over the last five years the valuation has been closer to a P/E of 14. With earnings poised for their first decline since 2012 that P/E will likely go even higher. Therein is part of the problem. Earnings in the energy sector, a significant chunk of the S&P 500, are going to be terrible thanks to oil's decline. This doesn't mean the market can't continue to rally. Stocks can stay expensive for a long time.
Market critics can definitely argue that U.S. and global economic data is unhealthy. There's no denying that. China is growing at its slowest pace in years. Europe has been struggling for years. The economic data in the U.S. has been limping along. Fortunately, we have a Chinese government that recognizes the issue and is actively trying to stimulate its economy. At the same time Europe is doing the same. The European Central Bank just started its QE program last month that will last until September 2016 or longer.
The biggest hammer bears could use on the market is disappointing earnings growth. Estimates suggest that both Q1 and Q2 will show earnings declines. Yet thus far, the pace of earnings, has not been as weak as expected. Of course it's important to note we are still early in the Q1 earnings season. The deeper we go into earnings season the quality of earnings tends to go down. That's what normally happens. This time may be an exception. Big cap earnings are being squeezed by the strong dollar. Small caps see less sales outside the U.S. and thus the strong dollar has a smaller impact on overall sales.
Here's the plan. The ETF for the S&P 500 is the SPY. Currently the SPY is hovering just below resistance at its all-time highs from February and March near 212.00. I want to avoid being triggered on an intraday spike higher that reverses lower. Therefore the strategy for this trade is to wait for the SPY to close above $212.25 then buy calls the next morning.
Trigger @ Wait for a close above $212.25, then buy calls.
- Suggested Positions -
Buy the JUN $215 CALL (SPY150619C215) current ask $1.84
option price is a current quote and not a suggested entry price.
Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.
Option Format: symbol-year-month-day-call-strike