June 9th, 2023

The New Bull Market Begins

Unemployment weekly claims jumped to a 19-month high and that pushed T-note yields lower. The Dow-30 climbed to a 5-week high. The softening of the job market is renewing hopes from the U.S. and Asian markets that the Fed will have had enough with their rate-hike agenda.

That was enough for technology stocks to resume their journey higher.

Market expectations for the Fed to raise rates another 0.25 basis points is down to 28%. Just last week, that number was up over 60%.

As I have said many times before, my issue is that everything is based on hope. While the CPI numbers are lower than a year ago, they are not within the Fed’s target percentage. If anything, there will be a pause, but I’m not expecting a rate decrease anytime soon unless the economy falls flat.

This could be an iceberg market situation, where what you see isn’t nearly as dangerous as what lingers below the surface.

Manufacturing isn’t growing. Interest rates are still high. We have growing global tensions and record-high consumer debt. We have more available commercial real estate than what we know what to do with (I think that will force companies to bring workers back into the office over the next few years).

These things are not the greatest recipe for a new bull market, but at the same time, the market seems determined to be done with the bear market. The S&P500 has risen more than 20% since the October 12, 2022, low.

The market continues to melt up and while the market is overdue for a pullback of some magnitude, the trend has now become a new bull market.  

Watch out for the small caps and mid-caps to join the bulls on parade.  I’m looking for the Russell 2000 ( IWM) to break out of its 12-month consolidation.  The IWM on a weekly chart has crossed above its 50-period (weeks) moving average and has roughly 5% to go before hitting a potential resistance area.  

If the market is accepting of risk in this new bull market, it would make sense for investors to seek out small and mid-cap stocks since they have the potential to have higher returns.

If this happens and you believe that we are indeed in a new bull market and bull markets last for 5 years on average, then you can take advantage of the low volatility we have right now and buy a 17 JAN (25) $180 call for around $30. Yes, that’s a lot of money. It would cost you about $3000 for one long option.

That’s where I’d look to sell calls against the position. We discussed potential resistance around $200, so you could look to sell the 21 JUL (23) $200 call for about $0.79.

There are over 500 days before the long-dated option expires. There are just over 40 days before the short-dated option expires. That means there are over 13 future opportunities to sell calls against your long call.

If you collect $0.79 in each of those 13 opportunities, you will collect over $10 in credit. That means your $30-long call can be worked down to a cost basis of $20. There are over 580 days from now until January of 2025 for IWM to climb above $200, the theoretical break-even level. Anything above $200 by January 2025 would be a profit!

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Jeff Wood
Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.