After another strong jobs report, the market is set to open higher this morning. After closing in the upper bollinger band yesterday, this morning’s gap higher is a slightly uncommon event. For years John and I have joked about market reversals on jobs reports as it seems to happen more often than not. The gap higher into the upper band also increases the likelihood of a short term market reversal.
With that said, my positions on SDS and CAT are set to open with losses on this market move higher. I plan to stick with my stop on CAT of yesterday’s high and will continue to ride SDS.
I am buying 30 Mar 92.5 puts on CAT for $2.50. Looking to use today’s high as a stopping point giving me about 30% risk barring a major gap higher. Since I’d like a bit more exposure to a potential market pullback than SDS, I am using the underperforming CAT that is still trading below its 7 day moving average.
Today’s market brings back thoughts of 2 past market conditions.
1. Jan 2013. On the 1st trading day of this year stocks gapped higher and held their gains. Many stocks were at the top of their charts but no longer overbought thanks to the pull back in weeks prior. While the 1st trading day of the year ended with solid gains, many stocks consolidated back towards their 7 day moving averages in the subsequent days offering fantastic buy opportunities.
2. July 2007: the SPX set a new intraday high in July and managed to stay there for a few days before the SPX fell over 100 points. The pullback was only a precursor to a new high to come in October but it jolted the markets and took the luster off the commodity boom that had led the market to new highs.
Admittedly, today’s market appears to be more like January of this year than July of 07 due to the strength in financials and transports. The strength of the dollar and relatively small pullback in bonds leaves for suspicion of the rally today and is why I have a small SDS position in play. The nature of the consolidation or potential pullback in the market in the coming days will speak volumes as to the future direction of the market but for now, the bulls are holding all the cards.
Buying 30 April 46 call options on SDS at 1.53. This is a small play on a market reversal. If things reverse lower today, I will add more but given market conditions, I feel the small risk is warranted. Later today, I will show what the price action in 2007 was like when all time highs were set.
I’m not very sold on anything in the market today. Big split with coal, oil, industrials moving lower while tech and banks push slightly higher. Dollar on pause today and bonds pulling back a bit. So far anything over 1520 in the market has been sold off. I’d be very curious to see the market gap higher tomorrow morning and reverse lower as it would set up some very nice bearish entries but for now I sit.