Stocks generally, and commodity and material stocks especially, have been on an absolute tear recently. While this rally seems to want to continue unabated, last week’s price action may have signaled a short-term top in the market.
Given that this is the best January we’ve seen in 15 years, and sentiment is at bullish extremes, I am expecting a short-term pullback over the next few weeks.
Earnings season has been less than stellar, multiples have expanded, future growth has been tempered by already-low readings, and revenues have not matched earnings growth.
Given that scenario, I’m looking for the S&P 500 to stall out at these levels and retrace about 3% of the recent heady gains, especially since the SPDR S&P 500 (NYSE:SPY) – the ETF that represents the S&P’s top 500 stocks across 24 industry groups — has been up 14 out of 18 trading days this year.
While the Federal Open Market Committee extended its zero-interest-rate policy (ZIRP) in its most recent statement, there was no explicit guarantee of any additional easing measures. Once the euphoria over a few months more of free money ebbs, I look for fundamentals (I know, what do fundamentals matter? But I am still a believer!) to take over, with the SPY closing near the $127 level by March options expiration.
Based on the SPY’s current market price of $131.82 and using a target price of $127, a target date of March 16, 2012, and $10,000 of investment capital, you can capture some nice gains by selling a March 127-132 call spread, buying a March 132-127 put spread or using another options strategy that best fits your trading style and goals.
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