[Watchlist]: Who to stalk…

IF we get a pullback.

Here’s where I’m at today.

On a long term basis, I’m bullish this market. The force in which it rallied off of the June 3rd low, lead by market leaders MSFT, ADBE, AMZN. As well as, Phoenix industry groups, the cloud kings, cyber security, and credit card companies, show me how strong the market is.

Just as the short squeeze recently sent us higher when the market got too bearish throughout May, I’m looking for the market to sell off because sentiment is too positive.

While I’m a bull in the long run, on a short-term basis, the most immediate problem I see is that the market will never go straight up or straight down… and I’m bracing currently for a pullback. 

Now while this is a good theory, it’s always backed up by signals.

There are several key signals I watch…

They tell me when it’s time to take profits on longs and either get flat or short. I look at the failure of the indexes, which sectors are leading/falling, the put/call ratio, and key industry groups (particularly IYT). 

Right now, you’ll notice the S&P made new, all-time highs. The Dow has stopped just short, and the Nasdaq faltered as well. The weakest of the four, the Russell, is already beginning to trade lower today, and I based on my analysis it’ll be the first one that falls. 

IYT, the Transportation averages ETF, is one of the best ‘heads ups’ in the market — before it rolls over. It typically leads… the market goes higher… falls first… before the market falls. Not only was it unable to make a new high at all this year, this last rally was the weakest one we have seen yet — and it’s already down more than 1% today.

That’s a big heads up for me that a pullback’s coming. 

The next heads up is the put/call ratio.

Just like we saw a very high put/call ratio on June 3rd, before the monster short squeeze, now, we’re seeing a very low put/call ratio. When the PCALL is high, too many people are short — and any catalyst (usually news that causes an overnight gap) sets it off.

In this instance, the put/call is telling me that everyone is long. And the longer the market trades higher… the safer investors feel. This causes the market to get lopsided, and then one morning, there’ll be a news related gap down, and all those longs will start selling at the same time. Once they don’t feel safe anymore. This is typically what causes market pullbacks.

So, for now I’m adding hedges and after the pullback I will start adding longs at better prices. 

Looking out into June —

While I’m waiting for a short-term pullback, my next main area of focus will be the ‘run into earnings.’

In the options market, this is one of my absolute favorite setups to trade. What we do is identify strong stocks, but fundamentally and technically, that dip within 3-4 weeks prior to their earnings report. This gives us a perfect buying opportunity, for a 3 week options trade, for the ‘run into earnings.’

Positive hype surrounding a stocks earnings report causes buying to come in, the 2 weeks or so before the report. So, we get in before… and ride the momentum. In the options market, we ride the rise in implied volatility as well.

So, after we get a pullback, and better entries, I’ll stalk:

• MSFT
• PYPL
• MA
• AXP
• V
• COST
• NFLX
• DIS
• WMT
• TGT
• Majority of the Cloud Stocks; ADBE (already had it’s run, but I do it every quarter)

Those are some of my favorites. I must note that for it to work you NEED a pullback. I do NOT buy the highs 3-4 weeks before earnings. This will be my prime focus for the next 6-8 weeks or so. The key is to buy fundamentally strong stocks, at key technical levels — on the tickers with the most hype.

Fun Fact: I also use this as an opportunity to add to my stock portfolio.