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Wall Street Elite
Liquid Bull Options
As we've been saying for the last two weeks, if the technicals indicated a breakout on the three major market averages, we would turn bullish. And so we have. Last week the Dow, NASDAQ and S&P 500 all scaled to new heights. We're now expecting a sustained bull March toward former all-time equity highs – and where she stops, nobody knows.
[We're talking specifically about the Dow and S&P 500. We would be very surprised if the NASDAQ ever ascended to its former millennial year top.]
Here's the chart of those three indices for the last two months:
At this point, the only question is whether there will be a retest of the old resistance line, now become support (in red, above).
Either way, we're not waiting. Our best instincts tell us it's now time to go long this market and employ a deep-in-the-money CALL option strategy, against which we will be writing (selling) CALLS intermittently.
More on that in a moment, but first, a little more explanation of our shift in position.
First, here's a longer term chart of the Dow:
Reverse head and shoulders formations like those in our chart above are essentially continuation patterns – unless they break down. In that case they can be used as very reliable reversal signals. The neckline on the RHS pattern of our chart above (in blue) has now been broken, and so, according to TA, the march north continues.
With last week's price action, Dow Theory is also now signalling a bullish confirmation. Here's a year's worth of daily action on the transports, which this week took their cue from the Industrials to surge roughly 5%.
As the chart indicates, it was the transports that led the break to new highs before retreating to wait for a Dow Industrial confirmation. When the Dow punched clearly higher last Tuesday, the Transports surged, setting new 52 week highs a day later.
A Rising Corporate Tide
While there's been plenty of bad news on the geopolitical front, including rising oil prices and a massive Japanese economy that's been dealt a severe body blow, corporate America has been doing a brisk business, pocketing big bucks in productivity gains and even bigger profits from the falling dollar. Here's a look at top line growth from the S&P 500 for the last decade:
No problem here. In fact, so long as the dollar continues to slide there will be great benefits to large American firms increasingly doing business on foreign shores, with particularly strong growth for those moving product in emerging markets. In short, a weak dollar makes 3M and Kimberly Clark winners from Geneva to Kiev to Katmandu.
The prospects for the dollar? For those who care to listen to Warren Buffett, the Nebraskan put it plainly last week when he said, "No question that the purchasing power of U.S. dollar will decline over time. Only question is at what rate it will happen."
Here's the buck of late:
The dollar index has taken out the last two layers of support before it heads toward all-time lows, set back in the pre-crash months of 2008. We see little reason why the dollar should not test those levels, nor why corporate America should cease generating continued strong revenues from overseas while it persists.
Finally, all of the foregoing may not matter a whit.
What in the world are you talking about?
Sad to say, but it's true.
It's quite possible that the only thing that matters anymore is government monetary policy, or, more specifically, Fed easing, QEn as it's now known to markets.
The Fed will almost certainly continue to backstop the stock market with liquidity infusions – it has made it clear a number of times that this is now a policy goal. A rising market (or one that doesn't fall too far, at the very least) is a confidence builder without parallel. Rising asset prices gets people spending like nothing else – and, in turn, gets banks lending). Both of these phenomena are necessary for growth.
And know this, too. It's no longer necessary for the United States Federal Reserve to be the one flipping the print switch on quantitative easing. China's central bank has done a yeoman's job of keeping the world drenched in paper currency over the last twelve months. See here:
Could this have had anything to do with silver's parabolic rise over the last seven months? With the price of foodstuffs flying the world over? China's money supply has grown faster than any other country on the planet of late, at times hitting monthly year-over-year growth rates of almost 20%.
And why limit it to China and the U.S. Central banks as a group can't get enough of this game.
The most recent entrant to the party is the Bank of Japan. Last month, the BOJ added the equivalent of $250 billion to its balance sheets and estimates are that the number will swell to a sum larger than QE2 ($600 billion) before the game is over.
With this move, it should be noted that the Japanese now possess a sovereign debt to GDP ratio of about 205% (!), making it ever more likely that that decades old economic funk that country has suffered will continue well into the foggy future.
All of which is to say, that the markets are going to be climbing steadily on this vast pool of liquidity sloshing about the planet, and that it will all end miserably, but that we have no other choice but to play it for what it's worth.
Trade Now!
As we mentioned earlier, we're buying deep-in-the-money index CALLS to capitalize on the run we're expecting. We're going d.i.m. because we want to maximize the intrinsic value of our options. And although it diminishes the wallop effect that at-the-money or out-of-the-money options possess, it also makes for a more conservative play should the trade go against us.
Because we're going out a long ways, we'll also profit from selling CALLS against the position on a monthly basis.
Important: we're holding our current, more bearish trades just as they are, as a decline may well be in the works as we speak.
Wall Street Elite recommends: immediate purchase of the SPY January 2013 90 CALLS, trading for $46.87, (bid), a mere half percent premium over intrinsic.
With kind regards,
Hugh L. O'Haynew, Analyst, Oakshire Financial
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