The Market Should Find Support Thursday – Gradually Start Selling OTM Put Spreads!

April 21, 2009
Author: Peter Stolcers, Founder of OneOption

Yesterday, fear raised its ugly head and the market had a nasty decline that lasted right into the closing bell. Decliners outnumbered advancers by 10 to 1. Comments over the weekend led investors to believe that the government would convert its TARP loans into common shares. That would be very dilutive and given the magnitude of the government's investment, they would become the largest shareholder. Investors do not want the government to run banks. Many financial institutions took the loans reluctantly and they just want to pay them back. All of the uncertainty is weighing on the financial sector and the market. In two weeks, the government will release the results of its "stress test". Some analysts believe that 16 out of the 18 banks will not pass. The government knows the outcome. They are releasing them to because they have been “spun” the figures to reflect stability. They would not carelessly spread fear into the fragile financial system with the noble thought of providing transparency. Earnings from Bank of America did little to calm nerves yesterday. They beat earnings estimates and Merrill Lynch made up 86% of the profits. The CEO painted a dismal picture and he said that the credit crisis would worsen. He did not offer any guidance and sellers pounded financial stocks. This morning, State Street, Northern Trust, Regions Financial, Zion's Bank, and Bank of New York were all hit hard after they released earnings. Before tomorrow’s open we will hear from Morgan Stanley and Wells Fargo. Morgan Stanley has a solid trading operation and that should help. Two weeks ago, Wells Fargo preannounced and that news should be factored into the stock price already. I don’t believe these two stocks will weigh on the market. As I mentioned yesterday, many cyclical stocks were releasing earnings this morning. The results were poor and those stocks are trading lower. CAT is the most notable. They missed by a large margin and they lowered full year EPS estimates by 50%. After the close we will hear from YHOO. The company has been struggling to find its footing and I'm not expecting great results. SNDK and STX will also release earnings after the close and computer sales have been light. Tomorrow, BA, KMB, MCD, NOC, and R release earnings. McDonald's and Northrop should be solid, but the rest will be weak. The market has been able to rebound from an early decline this morning. I don't feel there is enough good news to start a major rally today. The news overnight will favor the downside. As I look ahead, the earnings after the close Wednesday and before the open Thursday look pretty solid. If we combine that with another small decrease in initial jobless claims, Thursday could produce a nice rally and it should establish short-term support. In today's chart, you can see how the market has been able to rebound from deep one day declines. That was not the case two months ago. Buyers are getting more aggressive and they are willing to "buy the dips". I believe SPY 80 represents support and I am selling put credit spreads. I don't want to get too aggressive at this level so I am distancing myself by selling out of the money options. For today, advancers led decliners by 3 to 1 and I expect the market to hold its own. image

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