Happy Boxing Day – Need Strong Core for 2014?

For those who do not know the 26^th is Boxing Day, an extended Christmas Holiday celebrated in mostly English speaking nations who were formerly part of the British Empire outside of the U.S. The custom is to give money and other gifts to the poor or those in service roles who are needy. The day has nothing to do with boxing, which was surprising to discover. This spirit is truly what Christmas is all about.

As you recover from the festivities it is time to get a little selfish and put together a plan for 2014 related to your discretionary portfolio on the core side. Our first prediction in Monday’s Goldman Guide for 2014 was that the Dow Jones and S&P 500 will end the year 6% and 7% respectively, but reach 18,000 and 2,000 early in the year only to begin a decline in March in conjunction with a new budget battle.

Though the market dynamics may be shifting as we enter the New Year, technical analysis is still a strong indicator for stocks. If we do some quick math on our predictions above we are calling for a 10% rise on the Dow Jones and a 9% rise on the S&P 500 by March. It is worth reviewing what our most commonly used technical metrics indicate for these forecasts and to present a possible strategy to pursue some profit taking scenarios.

We will take a look at two ETF for these indices, the SPDR Dow Jones Industrial Average (NYSE – DIA - $163.16) and the SPDR S&P 500 (NYSE – SPY - $182.93). First, the Daily Moving Average has been a great short term metric and considering that there are 65 days until March 1, a useful one to use in this case. There are great signs for both DIA and SPY as the DMA for each is very bullish all the way out to the 50 day mark. Check one for our call here.

Let us also take a look at the put/call ratio for the March 2014 contracts. The table below summarizes some significant data.

The put call ratio is an excellent way to ‘follow the smart money’. Clearly both DIA and SPY give bullish signals as both are well below 1. Holding on to whatever you have to invest in these indices over the long haul is still a great idea, but playing some inexpensive March 2014 options could give you a nice short term profit opportunity to start 2014 off with a strong punch.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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