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Onward & Upward To New Highs

|Includes: AAPL, IWM, SPDR S&P 500 Trust ETF (SPY)
Broader Market Weekly Performance:
Dow           +0.96%
S&P            +1.04%
Nasdaq     +0.56%
Russell     +1.55%
VIX              +2.20% 
That market that just keeps keepin on kept on keepin on this week.
Here is a quick rundown of the week’s events:
-New highs reached and held 
-Doubled the closing low of S&P 666
-China raised reserve requirements...again
-Multi-family housing starts strong
-PPI, CPI, Import prices higher
-Jobless claims jump higher
-Retails Sales light
-New home sales weak
Momentum continues to push markets higher in a bullish technical trading pattern.  Every decline is swift and flushes out speculators but is bid right back up the next day. 
Corporate profits up 35% year over year, the European credit crisis has been averted (for now), and valuations for stocks on average are still low in the 13 P/E area.  While the market is overbought and sentiment is high, the rally can continue under these circumstances for some time.
Additionally, interest rates are still low, the Fed keeps pumping money into the market due to the murky jobs outlook, and this is the 3rdyear of the presidential term; all very bullish underpinnings to the market.  However, Inflation has started to creep in with this week’s PPI & CPI numbers.  Once inflation is realized as a real threat the Fed will back off the stimulus and the market party will experience “last call for alcohol [Fed kool-aid]”.
Overall though, economic conditions are improving and money is shifting out of bonds into equities.  This shift will continue as retail investors and asset managers chase the rally so they are not left behind.  This “chase buying” creates a continued melt up which drives more people to chase so they are not left behind either.  You can see the self fulfilling prophecy this creates; aka: bubble.  But it will not last forever. 
But, for the here and now, it has been a great month for the markets and a stellar 3 months.  With earnings season coming to a close the markets search for the next catalyst.  I anticipate more sideways trading with a continued upside bias until we reach Q1 earnings.  This sideways trading will help work off overbought conditions and setup the next leg of the rally. 
However, this may also be a good time for the market to shake out some of the excessive bullishness and pullback to set a nice support base for the next rally.  Moving averages are stacked with almost equal distance between them which will provide solid support for any pullback.  As well, last minute IRA contributions for tax reasons will keep a steady flow of money to buy any weakness.  Thirdly, there are strong psychological supports of S&P 1333 (double the S&P 666 low), and S&P 1300 that will stem any sustained advance.
As a result, I will continue to ladder credit spreads above the market while not getting too aggressive with any put spreads.  Any pullback will be swift and the meager credits available with such low volatility's make the risk/reward profile not that attractive for credit put plays.  Calendars are also worth looking if the anticipated sideways trading ensues before the next rally.
Areas of support remain at S&P 1333, 1300, and 1275. Resistance remains at S&P 1350.
Our AAPL call credit spread expired Friday for full profits of 9.17% in 9 days.  AAPL hit a new high this week but ultimately fell back Thursday and Friday on more Jobs absence/health news.  Our short strike was never in jeopardy and therefore allowed us to let the spread expire worthless for full profits…..and a little commission savings too :)
Our IWM credit call spread was bought back on Thursday prior to Friday’s expiration.  Read more at:  This Market Is Boring! The Melt-Up Continues
The bottom line is that we closed the IWM spread due to Thursday’s strength and the small margin of safety it left to the short strike.  Going into Op Ex Friday with a small margin or safety is not a smart move.  White knuckling OpEx Friday’s is no fun and ultimately not profitable.  You might make it through a couple but it will always bite you in the end.
We followed our Trading Rules and eliminated the potential liability of a loss by booking a $0.01 gain, enough to pay for commission.  Rule #1:  Don’t lose the money, Rule #2:  Refer to rule #1.  Capital conservation is the name of the game.
In preparation for next week a new SPY spread was open to take advantage of the President’s Day Holiday on Monday.  Theta will work to our advantage even more than usual as a result of the shortened trading week.  See you next week… off to Daytona for the 500!
Happy trading!
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