Traders and strategists say that the stock indices rally is likely to continue through December for a deceptively simple reason: Stocks have rallied significantly all year, and those gains are likely to beget further gains.
Since most fund managers have returned less than the market, there will be a temptation to buy into the end of the year to try to capture some last-minute gains—or at least make it look like they have owned the winners all year. After all, owning anything other than the S&P, Dow, and Nasdaq has not been a winning maneuver in 2013.
Commodities and bonds have given investors little or no return this year, while the Standard and Poor’s is up 20 percent while if you would have invested in Gold over the same period, you would be down over 20 percent. Earnings season is rapidly winding down, and the market has digested the mixed results. There are no major headwinds to speak of for the next week or two. Over the past 25 years, the Standard and Poor’s has risen an average of 2.4 percent over November and December, which is nothing to sneeze at. But in the 12 years since 1929 when the market has already rallied over 20 percent over the first 10 months of the year, the market has risen an impressive 4.8 percent on average.
Of course, stocks are also likely to get a lift from the Federal Reserve into the end of the year. The Fed’s bond-buying program has helped stocks by making other investments less attractive, and few expect the Fed to change policies before the end of the year. Recent talk of a possible December taper seems laughable despite the strong October jobs report.
In my view we sometimes see a pullback at the conclusion of earnings season and if we see a correction in stocks, it will only confirm a buying opportunity in my view.
I will look at buying the January E mini S&P 1800 call for a purchase price of 8 points, or in cash value $400.00. The risk therefore on the trade is the price paid for the call option plus all commissions and fees. Currently that call option is trading around 17 points, so I would be looking to buy on a dip if I see a correction.
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RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
