Market Can't Advance and Speed Bumps Are Getting Close—Sell Your Calls and Wait

09/08/2014 8:00 am EST

Focus: OPTIONS

After last week’s repeated attempts to move higher, Pete Stolcers of OneOption.com thinks the market is showing signs of exhaustion and needs time to gather strength, so, for the time being, he recommends selling your call positions and waiting.

The market tried to move higher all last week. It opened with a bang each day and prices gradually retraced throughout the day. This is a sign of exhaustion and the market needs to rest. Unfortunately, the longer we wait, the closer we get to some speed bumps.

All of the economic news has been excellent the last two weeks. Last Friday morning, the Unemployment Report showed that 143,000 new jobs were created in August. That was much lower than the 220,000 analysts were expecting. The S&P 500 was down seven points before the release. Traders were bracing themselves for a strong number and for a rise in interest rates. After the miss, the S&P futures rallied on the notion that the Fed has breathing room.

Personally, I don’t trust the government release. It is filled with adjustments. I do trust the ADP report. They actually process payrolls and they have their finger on the pulse of the labor market. The ADP report was strong.

Traders are likely to ignore Friday’s Unemployment Report. They will focus on all of the robust releases (GDP, durable goods, Chicago PMI, ISM manufacturing, Beige Book, ADP, auto sales and ISM services) in the last two weeks. Economic activity is strong and interest rates will start creeping higher ahead of the FOMC on September 17.

As I mentioned in my opening paragraph, the market needs time to gather strength. If it treads water for another week, the FOMC will be upon us. In October, HMOs will also announce insurance rate hikes. After that, the debt ceiling will come into focus.

Congress will have to raise the debt ceiling in October. If Republicans are smart, they will stay out of the headlines and they will raise the debt ceiling without a fight. Most analysts believe that they will win the Senate in the November elections. As usual, the debt ceiling negotiations will come down to the final hour and the market will get nervous.

I was mildly bullish at the start of last week and I started scaling into call positions. I thought we might have another week or two of positive price action and we did not get it. Last Thursday we had all of the good news we needed for the market to move higher and we saw profit-taking throughout the day.

I am selling my calls Friday morning near the opening bell. The market did not moved higher last week and I can scratch the trades. Resistance is building.

The news is light this week and I don’t see any catalysts.

I suggest exiting your call positions today. If you decide to hang on, use SPY $199 as your stop.

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By Pete Stolcers of OneOption.com

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