Train Kept A Rollin! A Breakout To New Highs During Quaruple Witching.

September 16, 2009
Author: Peter Stolcers, Founder of OneOption

I have been saying for the last few weeks that there is nothing to stand in the way of this market rally. Earnings have passed, interest rates remain low and economic releases are "less bad". Over 70% of the earnings releases beat expectations last quarter. This recession is more than a year old and Q3 earnings could actually grow year-over-year. Corporations have cut expenses and any incremental revenue growth will go right to the bottom line. This could be a huge morale booster for the market and I expect it to fuel a year-end rally. Interest rates are low and the Fed is committed to keeping them that way. Even though the "quantitative easing" program will end soon, the demand for US Treasuries has been brisk. Inflation is contained and that is not putting upward pressure on yields. Both the PPI and CPI were in line with expectations this week. I do have long-term concerns about our debt structure. We have financed our crisis by issuing short-term treasuries and our government has the equivalent of an ARM that will continually roll over. If interest rates creep higher in the future, our cost for this financial bailout will escalate. In the short term, this is not an issue. Economic releases continue to show that we are climbing our way out of the deepest trough since the Great Depression. Retail sales posted a nice gain yesterday and the Empire Manufacturing Index exceeded expectations. This morning, mortgage applications showed a slight decline, but they are still at the highest levels since early June. A 6% rise 30-year lending rates accounted for the change. Tomorrow, new home starts will be released and they could spark optimism. The downturn in new home construction has been so severe that we are due to see some signs of a bottom. If housing starts are poor, the market won’t drop because it is not expecting a good number. Initial jobless claims have not improved to the degree that many had hoped for, but they have improved. This number has not generated much of a market reaction and it is unlikely to do so tomorrow. The market is making new highs for the year and quadruple witching will have a positive influence. As the market grinds higher in a predictable fashion, traders will leg out of hedged positions on an intraday basis and that will "goose the market". The rally is getting a little too predictable and I would not be surprised if we see a big one day decline to keep the optimism in check. Stay long but trail your stops to lock in profits. I am short out of the money put spreads and those positions are performing well with three days to go. Overseas markets posted overnight gains and the backdrop looks good this morning. Adobe announced a takeover and M&A activity is restoring confidence. Look for a positive day with a grind higher. Advancers outnumber decliners by 2:1. image

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