Posted November 27, 2013 8:55
Recently, the S&P 500 had crossed the psychological barrier of 1800, almost reaching my year-end target of 1820. The way the market is setting up, along with the fact that December has historically been one of the most bullish months, I would not be surprised if the S&P 500 hit 1870 before the year is out. As I said in my previous blog post, I think that the financials are going to continue to outperform into year-end. The high-beta/high flyers seem to be running out of gas as they have been lagging the overall market over the past few months, but I think that these names can have a comeback rally and end the year at or near their respective highs.
Now, how would I play a year-end rally? Usually, I trade highly speculative and aggressive options, but I am instituting a different strategy into the New Year. Some of the call positions that I am looking of getting into is the SPY January 2014 $180 Call @$2.75-$3.00. This call is ATM and I would only need a 1.5% move by the middle of January to make money. Given that I think that the S&P 500 can hit 1870 by year-end, these calls are a conservative approach to play a year end melt-up. Furthermore, to add some beta to my portfolio, I am also looking at getting some calls on the QQQ (Nasdaq 100) and the IWM (Russell 2000). Why these two indices? I believe that tech and small caps will do very well into year-end and could potentially rally more than the S&P 500. I am also looking at ATM calls on all of those names, specifically, the $85 strike on the QQQ and the $113 strike on the IWM. Now for my take on gold, gold right now is oversold, simply put (no pun intended). The RSI is at 30 indicating that gold is oversold. I think that any bounces will present you with selling/shorting opportunities through puts. If I were to place a bet right now, the GLD December 119/117 put spread looks attractive since it costs $0.64 with the potential to make $1.36.
There are a few stocks that I think could have a strong rebound/push higher into year-end. These names include; TSLA, FB, CELG, C, FAS (3x Financial Bull ETF), and as a lotto play, Z. What I mean by a lotto play is that to buy Z stock is very risk since it is very volatile, but I think that it can easily rally back up to 90 in short order. If you still are holding the Apple (AAPL) calls that I recommended, I would hold them until AAPL hits 550-560 or shows any signs of weakness compared to the broader market. Overall, if you are a safe investor, I believe that buying ATM index options expiring in January is the smartest thing to do. The reason I say January is that if there is a pullback next month, I then believe that January will be a great month and then yield solid gains in these options. Barring any unforeseen disaster, I highly doubt that the S&P 500 does not hit 1850 by year end.
In my opinion, the high flyers have sold off too much from their highs and based on certain technical indicators, such as the MACD turning positive on many of these names, the Bollinger bands showing a breakout to the upside, and the fact that the RSI is now closer to oversold territory, then overbought territory makes me believe that many of these high-flyers can rally 10-15% in the month of December.