Look For A Positive Reaction To the FOMC and Afternoon Strength!

March 18, 2009
Author: Peter Stolcers, Founder of OneOption

Yesterday, bullish momentum gained traction and the market was able to grind higher the rest of the afternoon. The possibility for a big day (in either direction) still exists during the week of quadruple witching. Even though the market has rallied considerably off of its lows, I still believe the upside has the edge. This morning, the CPI rose by .4%. Analysts were expecting a rise of .1%. This is much "hotter" than expected and it will cause problems if it persists. As inflation heats up, interest rates will rise. This will increase the cost of our bailout programs and stimulus plans. The Fed has stated that it will buy US Treasuries to keep interest rates down. This practice is equivalent to printing money. If printing money was the solution to our problem, why didn't we do it decades ago? None of us would have to work, we could just print money. The fact of the matter is that it doesn't work. The dollar will devalue and we will lose our credit rating. I can't believe that some analysts actually feel this is an acceptable solution. Later today, we will hear from the Fed. They have fired every bullet and they have been extremely vocal. There is nothing else they can say or do to help us out of this situation. Fed Funds rates are 0% and banks are starting to turn a profit because of the large spread between their borrowing and lending rate. We are likely to hear that they will do anything to get us out of this rut (including buying US Treasuries). Tomorrow, the LEI and initial jobless claims will be released. Bad news is expected and I don't believe that weak numbers will drag the market lower. On the other hand, a slowdown in initial jobless claims could be seen as another glimmer of hope. It is only a week's worth of data so the reaction won't be "over the top". Perhaps the more important news will come when FedEx releases earnings before the open. I expect them to post a good number since fuel costs have dropped. Their guidance for next quarter will be critical and the market will be searching for signs of economic growth. The stock has bounced off of its lows and a decent earnings number is expected. Between initial jobless claims and FedEx, I believe there is a chance for an upside surprise. The market has rallied to a point where option expiration has a bullish bias. Any little catalyst could spark a short covering rally and the market could try to assault major resistance at SPY 81. I don't believe we will get through that level this week. After a nice rally the last week, the market is taking a breather today. The bulls will need to prove themselves again today. The last few days, the market has started off on a weak note and rallied in the afternoon. That is a positive sign. The breath of the rally has also been strong. As the month wears on, we will need new fundamental data to fuel this rally. It can come from the financials, housing or a drop in unemployment. However, without any confirmation, the duration of this rally is short-lived. Toward the end of the month, I can see prices drifting lower again. We are likely to find support above the lows established two weeks ago. The damage runs deep and this crisis will take years to resolve. Along the way, there will be great training opportunities on both sides. I expect the market to rebound today and the Fed will put a positive spin on conditions. It doesn't dare destroy what little confidence has been restored in the last week. Look for an afternoon rally and possible continuation the rest of the week. I am starting to sell April put premium and I am distancing myself from the action. Commodity stocks and retail stocks are my sectors of choice. image

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