Stock Option Trading Strategy – Long energy calls and short call spreads in retail and restaurant.

There is nothing like a “merger Monday” to cure what ails the market. Last week we had a huge round of earnings announcements. The financial stocks posted strong results; however, the market did not want to sponsor those issues. Cyclical stocks also posted great results, however, that was already factored into share prices. Cyclical stocks have been leading the market higher, but now they seem to be “fully priced”. Tech stocks have shown recent strength during the most recent rally and that’s a good sign because the market needs to attract investment in other sectors. The bad news is that Google, Yahoo and Intel all disappointed “the street”. This morning, much-anticipated consolidation within the oil drilling group materialized. Those stocks are all trading higher and the energy group is without question the safest haven. These companies continue to post robust results. Drug stocks have been dormant for quite a while and this morning that sector is starting to show a little life. Healthcare in general seems to have a lid on it. Most people feel the Democrats will take office next year and the threat of reform has the sector trading sideways. Last week the table was set for a nice expiration rally that would take us to new highs. When that failed to materialize, I started to become suspicious. While today’s bounce is nice, I wonder if the remaining earnings this week will be able to fuel the market to new highs. I’m still not seeing participation from the financial stocks and I feel that it’s the missing piece of the puzzle. Higher interest rates and subprime woes continue to pressure those stocks. At this juncture I like being long energy and I like being short retail and restaurants. That formula has been working for the last four months and I’m going to stay the course. For today, I believe the market will grind higher in an effort to erase Friday’s decline. It might make back those losses but I’m not looking for much additional upside. This is a big week for earnings releases and by the end of the week will be able to gauge the earnings growth rate for the quarter. I believe a number above 6% will give the market enough ammunition to continue its rally provided the 10-year yield stays below 5 ¼ percent.

Daily Bulletin Continues...