01/08/2012 Market Recap - 2012 Starts With A Roar, Ends With A Whimper

Market's started the week with a solid gap up and spent the rest of the week defending the gains.  Excluding Tuesday's enthusiastic open, the rest of the days this week each opened in the red and spent the rest of the day clawing back to positive, or at least marginally red, closes. 

 

The economic data was pretty good this week with ISM, Retail numbers, and Jobs data.  However, the market could not push past Tuesday's intraday high.  The fact that the market could not push higher given the solid data is somewhat troubling. 

 

The Holidays brought a lift into year end but not a very confidence inspiring one.  Merely  the typical Santa Rally closing the year well below the late Oct, early Nov, and early Dec highs.  When markets can't muster strength into the end of the year it is not a positive sign.

 

Now don't think I am calling for the another 2008 in 2012; although the Euro-debt crisis is greater in financial magnitude than the mortgage debacle and has the wherewithal to make 2008 look attractive in comparison.  But, the trading in late 2011 compares almost exactly to the trading in late 2007.  Coincidence or foreshadowing?....we'll see soon enough.

  

So how do you trade it?  The key to navigating markets like this is to stay above the market and don't get aggressive underneath it.  Call credit spreads and put debit spreads are tactical strategies that can keep you out of danger.  The real risk is getting caught in an unexpected market downdraft; which are common and violent in headline driven markets like we are currently in.

 

Markets fall MUCH faster than they rise.  Short put spreads can get annihilated in a swift decline causing heavy losses.  Short call spreads on the other hand are typically easily adjusted if the market has more strength than anticipated thereby threatening the short calls.  I am always extremely cautious with short puts in any market, much less in a headline driven toppy market.  Those of you whom have experienced Rule 48 or lock limit down days understand my trepidation all too well.

 

I expect the S&P to experience some weakness this coming week as the recent gains have been on light volume and contracting volatility.  If the S&P is able to break higher through 1280-1284 resistance, it is likely to induce a short-covering rally to 1300-1305.  If said rally comes to fruition I would be very aggressive selling call spreads and layering on put debit spreads.  Why? Because the market is already overbought and needs to pull back, preferably to the 200 DMA (approx. 1258), to provide a solid foundation for a continued rally.