Breakout

How to Trade the New Year Market

Jeff Macke
Breakout

The S&P 500 (^GSPC) has come out of the gates screaming in 2013. The broad index has already gained about 3% for the year, pushed higher by an agreement on the fiscal cliff removing the dreaded "uncertainty" that plagued stocks at the end of 2012. Those looking to put money to work now are stuck wondering whether buying now is chasing or getting in before the rally really picks up steam.

Bill Baruch, market strategist at iiTrader.com is in the latter camp. "You've got to look at the market from the long side," he says in the attached video. He has a 1,510 target for the S&P in the first quarter --a potential 3% gain from where the benchmark opened today. A week ago 1,510 was a gutsy call, but much less so now. The target is less important than how stocks move higher. On that count Baruch is encouraged.

Related: Shake Hands With This New Year Rally, Don’t Hug It

One thing traders use to judge the quality of the rally is the value of currency. If the dollar is falling in value relative to the rest of the world, stocks may move higher, but only because it takes more dollars to buy anything. What makes Baruch optimistic is that stocks have managed this rally despite the dollar moving higher early in 2013. It may seem like a wonky point, but of such observations are fortunes made in the trading pits.

Related: January Barometer: How to Trade the New Year

Looking ahead Baruch cautions against ignoring the debt ceiling debate coming next month. He's hedging his bullish bet by selling calls and buying puts. Selling calls will lock in any gains if and when markets move above his strike prices. Buying the puts takes advantage of historically low Vix (^VIX) levels to get long some protection at low prices.

As befitting his hedged posture, Baruch has a stop level just below where we started the year at 1,425 on the S&P. As for the upside, if stocks can get above his 1,510 target he thinks a blow-off rally could be in the offing.

"A lot of people missed the move last year staying on the sidelines," he notes, "they're not going to let that happen two years in a row."

Related: Two Sectors and a Stock Pick for 2013

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