02/13/11 Weekend Update & Outlook - The Market That Keeps On Keepin On

Broader Market Weekly Performance:

Dow +1.50%

S&P +1.40%

Nasdaq +1.75%

Russell +2.74%

VIX -2.91%

BookingAlpha.com

MARKET UPDATE:

The market continued the melt-up this week tacking on another +1.5%+/-. Egypt was ignored as well as a Japanese credit downgrade and another interest rate increase in China.

Here is a quick rundown of the week's events:

Pros:

-Small Business Index rises to highest level since late 2007

-Initial Jobless Claims below 400k

-Us Exports rise, closing in on record high

-China still firing on all cylinders and interest rates are raised again to slow inflation pressures

-Market held last week's highs and rise even higher

Cons:

-Lackluster trading volumes

-Mortgage rates over 5%

-Egypt still a wild-card (although the markets don't seem to care)

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Corporate profits are hot and money is shifting out of bonds into equities. European credit concerns have been squashed with the ECB's new credit facility (bailout). The FED is still full steam ahead with QE2 as the jobs market is still too anemic to withdraw the stimulus. These factors combine to fuel the current rally and there is still more gas in the tank.

Investors, fearing they are going to miss the rally, are piling into stocks and fanning the flames of the melt-up. Trading volumes were thin this week but price action is the bottom line, and it was positive. I do think we will see S&P 1350 soon.

Be advised though, I don't want to sound too drunk on the kool-aid. Investor confidence remains near the moon and the market has gone straight up since early December 2010 with no real pullback to speak of. I do feel that there is a little too much giddy-ness out there and we could have a swift 5-8% correction in the blink of an eye.

Such a pullback is long overdue and could happen anytime; especially as we reach the end of earnings season. However, we could continue overbought and get more overbought before the pullback happens. Remember: The market can stay irrational longer than you can stay solvent.

So, considering those circumstances, I continue to sell credit spreads above the market but am weary to get aggressive with any put spreads under the market. Why? Because when a pullback comes, and it will .....someday, it will be swift and large. The meager credits available on puts right now due to rock bottom volatility are not worth the liability of a large overdue pullback.

Areas of support remain at S&P 1300, 1280, 1260, 1225ish, and ultimately at 1175. Resistance remains at S&P 1335 and 1350.

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BOOKINGALPHA UPDATE:

See my posts on Option Pinning Friday -and- Pin Risk & Avoiding Assigmnent for more about this wild week of trading.

BookingAlpha subscribers went into Friday with Iron Condors on SPY and IWM utilizing weekly options. Friday's melt up to new highs required the call credit spreads of the Condors to be closed as the short strikes of the call spreads were breached. The call spreads of the Iron Condors were out of the money (which is a good thing and what we want) Friday morning but the market continued to grind higher throughout the day. Fortunately, the put spreads of the Iron Condors expired for full profit and offset the marginal losses incurred on the credit spreads. In whole, the SPY & IWM Iron Condor positions netted to be profitable.

New positions in AAPL and IWM were established this week and we are evaluating CSCO and AKAM for entries.

Happy trading!

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