I hope everyone had a wonderful New Year—although the same can’t be said for the market. After seeing a bit of the Santa Claus rally into Christmas, the strength began to fade as the S&P 500 moved steadily lower for most of last week. That weakness has continued through to today, with European concerns and declining oil prices sending all three indexes down over 1%.
While this is a rough way to start 2015, it doesn’t raise any new red flags nor does it mean the market will be down all year. We talked in last week’s update about a potential bumpy January as larger macro stories play out, and that’s exactly what we’re dealing with. And we’re likely to see this volatility continue as richly valued stocks, uncertain world economies and declining oil prices weigh on the market.
In the near term, we could see a test of the S&P’s recent 1,972 bottom, but ultimately I believe the market will begin to firm later in the week in anticipation of a favorable employment report on Friday.
Since closing out of the AAPL January $109 calls last Monday, we’ve moved to the sidelines to wait out the light holiday trading volume that can make it difficult to confirm trends. I had hoped to get back into trading today, but the sharp pullback dictated that we continue to wait until the volatility evens out. However, I still see plenty of trading opportunities ahead this week as volume levels return to normal and strong names hit resistance levels to bounce off of.
In particular, I’m keeping a close eye on our usual candidates to buy on pullbacks, including Facebook (FB), Apple (AAPL) and Alibaba (BABA). All three have moved lower recently after making solid moves to the upside, and I expect these names to regain momentum as they reach support levels. Once I find an attractive entry point for us, I’ll be in touch right away with a Trade Alert, so make sure to keep an eye on your inbox! And if you haven’t already, I recommend signing up for my text message service so you can have all my actionable advice sent straight to your phone.
I’m also looking to get back into Bank of America (BAC). The stock traded well with the rest of the financial sector during the market weakness, but began to pull back Friday and logged its second down day today. I generally like to see a three-day pullback before making any moves, since stocks that pull back for a few days after a run are usually getting ready for another leg higher. That then gives us a chance to get in at the bottom and make a quick profit. (You can learn more about my trend-trading strategy here. And if you’re just joining us, I recommend taking a look at my Getting Started Guide to learn more about the ins and outs of options and how we trade them.)
As we move further into 2015, I’ll also continue to watch leading groups closely for an indication of market sentiment, including biotechs (one of 2014’s best sectors) and small caps. Historically, when these areas are in favor, investors tend to take on more risk and shy away from panic selling.
The “dogs of the Dow” are also worth watching. This is a popular theory on Wall Street that the worst performers of the previous year – like Amazon and IBM – could be set up for a bottom and attract buyers that would then move them higher. If I see solid options activity, these may be names we’ll play.
Regardless of what the market throws our way, I expect there to be plenty of trades for us to take advantage of. We’ll continue to focus on the best trading stocks and look to buy in on pullbacks. We’ll also stick to limiting losses and take our profits when we have them.
Here’s to a fun and profitable 2015!
Sincerely,
Hilary Kramer
Editor, High Octane Trader