Time for a Rest
It's official. It's time for the stock market to take a rest. If you've been sitting on the sidelines waiting to jump in . . . and you are just about to do it now . . . hold on to your wallet.
We've had an unprecedented "liquidity crisis" rally up to the S&P 500 1,350 level. Stocks like AAPL have added over $25 billion in market cap in just the last few weeks alone. It's been an amazing run.
Liquidity crisis?
Yes. There is a sea of cash swirling around out there thanks to Quantitative Easing. Banks find it too risky to lend all that money they are sitting on. I mean, it would only stimulate economic growth and all . . . but they are more concerned about their own bottom line, not the country's. So they just sit on their cash like the pigs wallowing in their favorite mud pile.
But I digress . . . back to the amazing stock market rally. What about it?
It's too late to get in . . . for now.
This market has fired off multiple technical signals for a short term top, and I'm looking for these recent highs to hold over the next 4 weeks of trading. This means a couple of things.
First, be patient. If you've been sitting on the sidelines waiting to get in . . . now is not the time. It would be a classic case of buying the top, which is what the "crowds" tend to do. It happens when the emotional pain of "leaving money on the table" becomes too great to resist. It triggers an impulse in the brain to "dive in" and be a part of the move ... at exactly the wrong time.
Resist that urge!
The emotional part of your brain is the absolute worst judge of when to get in and out of stocks. In fact, if you did the exact opposite of what your emotions told you to do over the years, my guess is you would be well ahead on your investments.
So what to do now, with this current market?
As I said before, I'm looking at a lot of different signals coming together this week to call an intermediate term top in this market. And there are two main plays I'm looking at setting up here.
The first is to start buying March series put options on SPY. The underlying SPY is trading between $134 and $135 as of late. I'm looking to buy March series $137 put options on the SPY at current levels, all the way up to $136, with a stop loss at $140. That is, if the SPY hits $140, then I'm going to close out my put position.
For targets, I'm looking for two levels. First, a move back to $130. If that level is hit, I would sell half my position and move my stop loss to my breakeven point. From there, I'm looking for a move back to $126.
And this brings me to the next part of this trade. I'm looking for this decline to hold and for stocks to launch themselves higher once again. Remember what I said about the sea of cash? Well, it's not going away and it will still be out there looking for a home. The banks will continue to wallow in their mud pile for the foreseeable future.
I'm looking for a sell off to hold, and one of my favorite stocks to buy on a sell off is AAPL. I'm looking for AAPL to trade back to $450. On any move to that level, I'm looking to pick up March $440 call options on AAPL. I would then look for a bounce back to $475 at which point I'd sell half my position and move my stop to breakeven. After that I'd look for AAPL to test $500 once again.
This rally has been a classic "short killing" rally, meaning all of the hedge funds who shorted this market are getting taken out back and beat upside the head with a piece of plywood. The pain will only stop when they cry "uncle" and cover their positions. Once they are done covering their positions, the market will be free to sell off for a spell. That is the phase we are heading into now.
Successful investing,
John Frederick Carter
About the author
John Carter's father was a Morgan Stanley stock broker. One day during high school, John came home from the mall where he was working at a store making cookies. He had saved up $1000 over the course of... Read Full Bio »
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