Stock Option Trading Strategy – Favor the long side (commodities & tech) and keep your size small.

This morning the market is pushing higher based on lower than expected Initial Jobless Claims and better than expected retail sales from Wal-Mart. Yesterday, the Beige Book revealed a solid domestic economy. I am way out on a limb, but I do not believe the Fed is going to lower interest rates. The market has already priced in a 100% chance of a quarter-point cut during the next FOMC meeting in two weeks. If the Fed does not cut, the market is likely to have a very negative initial reaction. I believe that trough will present an excellent buying opportunity. Once traders realize that the Fed is not simply digging in its heels in, they will realize that economic conditions are stable. The Fed has better information than the rest of us and they are not simply basing their decisions on traditional indicators. For example, yesterday Fed officials met with the CEOs from all of the major homebuilders and lenders. They are trying to get an accurate read on the future impact of the housing decline. I'm sure that this group was painting a dire picture while they were lobbying for a rate cut. The Fed is mindful of that and they realize that housing only makes up 5% of our GDP. Normally, housing related layoffs take one year to start surfacing once the peak has been established. We are now well in to our second year of the housing bubble. I believe employment growth due to global economic expansion has offset housing related declines. I believe we will see a moderate Unemployment Report tomorrow. That could create some chaos. The bears will be arguing that the number represents "old data". The bulls will complain that it lowers the chances for a rate cut. With every solid economic number that is posted, I get a little more bullish. Particularly when the market reacts negatively due to a diminished chance for a rate cut. If this scenario starts to unfold I will start nibbling at long positions. I won't take any large positions ahead of the FOMC because of my opinion on how things will play out. After the FOMC I am likely to get aggressive. I will use the Fed as my guide. The market has fallen into a tight range and some of the volatility is starting to decrease. We are still above the critical SPY 146 level. As long as it holds, favor the long side. Commodity stocks and tech are the place to be.

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