The Momentum Is Strong – Trade It and Keep Your Distance – Don’t Ignore January’s Warning Shot

March 5, 2010
Author: Peter Stolcers, Founder of OneOption

This morning, the long-awaited Unemployment Report was released. Many analysts felt that bad weather would adversely impact the number and estimates were revised lower. Regardless of how the number actually came out, the market seem prepared to rally off of the release. The unemployment rate held steady at 9.7% and 36,000 jobs were lost in February. This was better than the 50,000 job losses analysts projected. Job losses for January and December were revised to show 35,000 fewer jobs. All told, the market loved this number. Over the last four months, we have not seen job growth even though it has been projected. We are hovering at this level and the stimulus programs have largely run their course. Disenchanted workers have been removed from these numbers if they have given up the job search. Also, workers who have exhausted 24 months worth of employment compensation are also excluded from the number even though they continued to draw benefits for another 76 months under the government's extension. We are being led to believe that the number is actually better than it is. Democrats are trying to force through a health care plan. They are holding a special meeting and if they can get more than 50 votes in the Senate they will push it through. There are 59 Democrats in the Senate and Obama is riding them hard. This regime is losing its credibility with each passing week and if it can't score a victory soon Democrats will lose elections in November. Overnight, Greece successfully held a €5 billion bond auction. The bid to cover was 3.0 and the yield was 6.5% (twice that of Germany's). It still needs to raise €20 billion by the end of the year and Germany said that it won't lend a penny. Today, Greek labor unions are rioting. More than 7000 people gathered to protest the austerity program. The strikes and violence will hurt tourism and it will make it more difficult for Greece to attract capital. The problems in Europe will continue to fester. It may take many months or perhaps a year for conditions to reach a breaking point. Until then, the market seems content to focus on the positives. Earnings season has ended and the economic calendar is very light next week. The market has a strong head of steam and the momentum should carry it higher. Resistance will build as it gets closer to the highs of the year. Monday's have been very bullish and M&A activity is on the rise. The market is breathing a sigh of relief now that the employment number and the Greek bond auction are behind it. I expect today's bullish action to hold up and we might grind higher into the close. If we make a new high for the year next week, option expiration will spark short covering and buy programs are likely to kick in. This will only happen if the momentum continues. Retail, tech and energy look particularly attractive for put writing. Keep your size small and write some puts. Consider going out to April and distance yourself from the stock price. image

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