Use Today’s Strength To Line Up Put Credit Spread Candidates. Wait For Friday’s Number!

November 5, 2009
Author: Peter Stolcers, Founder of OneOption

After a nasty decline a week ago, the market has gradually been able to reestablish support. The three-month uptrend was preserved when the SPY crossed back above $104. This is a great environment to sell out of the money put credit spreads on strong stocks. Last week, GDP rose 3.5% in the third quarter and that was much better than expected. This week, ISM manufacturing and ISM services showed economic expansion and both were above 50. Yesterday, the ADP employment index was in line and last month's figure was revised to reflect better employment. This morning, initial jobless claims fell by 20,000 and the four-week moving average decreased by 3000. Continuing claims dropped by a whopping 68,000 to 5.75 million. Economic releases continue to show gradual improvement and that is positive for stocks. Yesterday, the FOMC left its statement unchanged. They are committed to keeping interest rates low and this is also bullish. Over 80% of the companies that have reported earnings have exceeded estimates. Less than 10% of the S&P 500 has yet to report. After yesterday's closing bell, Cisco announced better-than-expected results. Viewed as a bellwether for business investment, the company posted 6% revenue growth sequentially and they are projecting a rise of 2% to 5% next quarter. The CEO said that this is undeniably the start of a recovery. "Less bad" economic numbers, low interest rates and solid earnings will support this market. We are likely to see a year-end rally that could take us up to SPY $110; Wall Street would love this since bonus checks would get cut. Without question, the headwinds will start blowing as “2010” approaches. However, the current conditions will overpower future concerns for the next two months. Today's favorable initial jobless claims number will not be reflected in tomorrow's Unemployment Report. In the previous four weeks, initial jobless claims have not shown much improvement. I believe this sets us up for disappointment tomorrow morning. The market is likely to pull back and that decline will set up an excellent buying opportunity into year-end. Next week, earnings releases and economic news are light. This means that the market will feed off of information it already has. Seasonal strength combined with favorable conditions will prevail and prices will gradually rebound. I am not bullish enough to buy calls. I want to distance myself from the action by selling out of the money put credit spreads. The strategy has been producing great profits for the last four months and I have not taken any heat during the recent pullbacks. Nervous trading will set in this afternoon. Line up your stocks and use today's strength to identify your longs. Stocks that have held support and are performing well today will be your best candidates. Make sure support and long-term uptrends are intact and review the recent earnings reports. There are great profits to be made over the next two months. Use the Live Update table as your guide and focus on stocks that have been rising to the top of the bullish watch list. image

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