Today the SP-500 hit new all-time highs intraday indicating continuing buying pressue inspite of some daunting fundamentals.
That strong upside momentum prompted us to close our call spreads this past Friday–but we still managed to come out okay on our SPX trades. As the index flattened out Friday afternoon we took in some offsetting premium just two hours before the close to finish with a nice 6% profit.
The RUT was a different story–we got out of that one as well but haven't taken any offsetting premium–yet. The good news is the market offers plenty of opportunities–like todays initiation of a new SPX trade expiring this Friday that has an excellent chance of making this week profitable as well.
That's all good but where are our next profits hiding? To find out let's take a look at…
The Markets and How They Affect Us
After dipping below the 3 week range from July the SP-500 quickly rebounded to new all-time highs…
As you can see from the chart above the SPX rebounded mightily from last Tuesday's dip even before the big jobs report on Friday. But once that report hit the wires it was like throwing gas on a fire sparking a breakout to new all-time highs. That tells us there is still plenty of buying interest in spite of weakening fundamentals.
And make no mistake–the fundamentals are weakening. Today the Labor Department announced that productivity in the second quarter unexpectedly fell 0.5%, well below expectations of +.4%. This report marks the 3rd quarterly decline in a row–and according to UBS, there has never been three quarters of declines outside of a recession. The last time this happened was in 1974 and 1979 when interest rates were in the 15% range.
And it's not just the past 3 quarters–the average annual rate of productivity growth from 2007 to 2015 has sunk to 1.3%, 36% below the long-term rate of 2.2% per year from 1947 to 2014. Productivity is important because it helps create overall growth in the economy–without it both earnings and consumer spending power decline.
However it's telling that negative economic news like the above barely dented today's rally. The SPX pulled back from this morning's highs, but still managed to close positive on the day. And that tells us there is still plenty of money finding it's way into the US stock market.
And it's not just the bigcaps–the Nasdaq closed 4 points into new high territory at 5,225, while the SP-500 missed closing at a new all-time high by just one point. Obviously traders are not too worried.
As we've talked about the big driver of the stock market right now is obviously not improving economics or earnings–both are trending lower. There is something bigger than both–at least for now. With interest rates at record lows and $13 trillion dollars in negative interest rate territory, investors and institutions have to buy stocks to get any kind of return–there is no alternative.
That will stop when the Fed raises rates, but based on the current economic reports, that isn't likely to happen for quite awhile.
Meanwhile we've had over three weeks of sideways consolidation on the SPX and that suggests traders don't believe we are heading lower–because as we've seen there have been plenty of opportunities for a sell-off. Every minor dip has been bought and traders are still buying the dips. When that trend changes it will be time to get short and the signal to look for is a break below last Tuesday's low at 2147. Until then the market is telling us it wants to run–the question is…
How Do We Make Money on It?
Our first trade is on a stock that just released earnings last week and proceeded to gap straight up–but now it's retracing giving us an excellent opportunity to sell a new put spread below support for a generous 10-day 22% gain.
And for our Roth Retirement trade we're looking at an out of the money condor for a potential 8-day 25% win.
We've got two good looking trades lined up to take advantage of the current market–so let's get to it…
Click here to gain access to today's picks.
Keep up the good work,
Peter