Look For Support Later This Week – Then Start Selling Bullish OTM Put Spreads!

March 31, 2009
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market pulled back on news that the government had rejected the restructuring plans by GM and Chrysler. In reality, this was already priced into the market and the news should not have come as a surprise. Once the early momentum had been established, prices continued to fall the entire day. In a three-week period, the market had rallied more than 20% from its lows. That created an overbought condition and we were due for a selloff. The market continues to search for signs of light and traders (and the media) are focusing on the positive aspects of every news release. The fact that things aren't deteriorating as quickly as they had been is being peddled as good news. Conditions are as bad as they've been in 30 years and we need to be mindful of that when we are trading bear market rallies. The government wants a new plan from GM in the next 30 days before it decides whether or not to add capital. The CEO was asked to resign and a new board will be appointed. Chrysler needs to finalize its deal with Fiat in the next month to secure an additional $6 billion in funding. The government has stated that it will back all warrantees for both companies should they choose the route of bankruptcy. This morning, consumer confidence barely budged from its all-time low. Americans are still worried about the job situation and they are not spending money. The Case-Schiller Index showed that home prices declined 19% year-over-year and that was expected. Tomorrow, we will get the ADP employment index and ISM manufacturing. The ADP employment index is expected to show a decline of 648,000 jobs in March, down from 697,000 in February. There is a good chance that the market will get spooked if the number comes out materially worse. Manufacturing has been dismal and given plant shutdowns in the auto industry and the number is likely to come in low. This market is priced for bad news, but it could creep down to the SPY 75 support level before Friday. Initial jobless claims will be released Thursday and those results will not be included in Friday's number. However, they will indicate if the rate of job losses has changed. The unemployment rate has taken on a parabolic look and sooner or later, the rate of acceleration will slow down. The market is looking for any positive signs and that will be a major one. Americans have been losing work at a record pace and that simply has to slow down in the next few months. Don't interpret my statements to be bullish. I am simply trying to forecast the market's reaction to a likely event. The employment picture is dire and when combined with high debt levels, it creates extreme credit risk. A bid in the market has been established and I believe we will find support this week. The Fed and Treasury have been very progressive and their actions should provide a temporary boost to the market. Shorts still need to be squeezed and a breakout above SPY 85 could fuel us to SPY 92. I don't want to get ahead of myself, but this move could unfold over the next two months. We recently saw great volume and depth to the rally and Asset Managers are anxious to put some of the $9 trillion that sits on the sidelines to work. For today, we have a solid rally and advancers lead decliners by 3 to 1. Tomorrow and Thursday, we could see weakness. The last four Unemployment Reports have been marked by selling ahead of the number and support after the actual release. I believe we will see a nice opportunity this week to sell put premium and I'm already starting to scale in. Towards the end of the week, I will have half of my desired risk exposure. I like agricultural, retail and restaurant stocks. You must be selective! Daily Report subscribers should focus on the Live Update table and look for strength in these areas. image

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