Continued Strength This Week – Take Partial Profits On Longs Before Friday’s Close!

March 19, 2009
Author: Peter Stolcers, Founder of OneOption

Yesterday, I mentioned that the FOMC comments would be market friendly. As predicted, the market rallied after the news and it sits within striking distance of major resistance at SPY 81. The Fed said that they plan to buy at least half of the home loans made in the US this year. That amounts to $750 billion in new mortgages. The average rate for a 30-year fixed-rate mortgage fell by .4% after the news. They also said that they will buy up to $300 billion of long-term government bonds. This is equivalent to printing money and commodity prices shot higher as the dollar plunged. I do not believe this practice is in the best interest of our country and this is clearly an act of desperation. Even though the initial reaction was positive, the market pulled back from its highs. This morning, it is testing the downside and Asset Managers clearly question this decision. South American countries have been known to use this tactic and their credit worthiness has never been restored. Initial jobless claims rose by a smaller rate than expected and it provided a small boost to the market. Continuing claims surged 185,000 to 5.47 million. Unemployment is still the biggest economic concern. Leading Economic Indicators fell by .4% in February and analysts were expecting a decline of .6%. This is a weak number, but it came as no surprise. Federal Express, a widely used barometer for economic activity, stated that global economic conditions are worse than expected. The duration of the recession will require that they take additional cost-cutting actions. The financials have been leading this rally and yesterday's news will help them. Homeowners will be able to refinance and that could reduce mortgage foreclosures. Home purchases are likely to rise and that will help real estate values, not to mention toxic asset values. Additionally, lower monthly mortgage payments could stimulate consumer spending. Citigroup, Bank of America, and J.P. Morgan Chase all said that they are showing operating profits for the first few months this year. The huge spread between their borrowing rate and the lending rate will eventually offset massive write-downs. It is simply a matter of time. Unfortunately, time is the missing piece of the puzzle. To put this into perspective, Citigroup said that it is showing an $8.3 billion gain in the first two months this year. However, it has $350 billion in toxic assets and it owes taxpayers $45 billion. This morning, GE Capital said that it will be profitable in 2009 if the economy holds true to the Federal Reserve's current forecast. We will not see a sustained rally unless the financial sector improves. Investors need to feel that the threat of a financial collapse no longer exists. The economic news next week will focus on durable goods orders, GDP and initial jobless claims. All three were much weaker than expected last month and the market was able to take the numbers in stride. Business investment was perhaps the most concerning component of these numbers last month. In order for employment to improve, businesses need to make capital expenditures. This is where Obama's stimulus package fell short. He is spending money on social programs when he should be focusing on investment tax credits and payroll tax credits. The market has rallied 20% off of its lows two weeks ago. This is a nice short covering rally and it was created by good fundamental news (not bailouts or stimulus plans). The market almost rallied to major resistance at SPY 81. Quadruple witching helped to fuel the rally and I told you that a big move was on the horizon this week and that it favored the upside. In order to get through this resistance level, we will need another good round of fundamental news. I don't see that coming from any of the releases. Consequently, I feel that we will consolidate at this price level next week. The end of March tends to be bearish and I would not be surprised to see a pullback. That move should establish a lower high and I believe the lows from two weeks ago will hold for quite some time. Each day this week, the market has had to overcome early weakness. It has rallied late in the day and the breath has been good. This is a positive sign and we are in buy program territory. I believe we will grind higher this afternoon. If you have nice profits on long positions, I would take some of those gains by the close Friday. I will be playing commodity stocks and I am selling out of the money put credit spreads. If the market declines, I feel the stocks will hold up well. The Fed's actions are very inflationary. image

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