Support Has Been Breached – Be Prepared For A Gradual Leg Down!

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

Yesterday, fear gripped the market regardless of the stimulus plan and it declined right into the closing bell. Major support at SPY 80 was broken and the market is poised to retest the lows from November. The President outlined a $275 billion homeowner bailout plan today. He believes this will help 9 million families stay in their homes. The plan is directed at those who "played by the rules and acted responsibly". Taxpayers will be burdened by those who lived beyond their means. This plan will help financial institutions as well and we need that stability to move forward. Banks have not written down their real estate assets and if the foreclosure problem escalates, many financial institutions will fail. Our economy is hemorrhaging from all areas. Financial institutions are undercapitalized and have "toxic assets". The government has $11 trillion in debt and it needs to raise $2 trillion this year. States can't balance their budget and they are also running huge deficits. The unemployment rate continues to climb and loan defaults of every type are on the rise. Consumers are cutting corners wherever possible and the savings rate has spiked. Nine out of ten sectors have missed earnings and the guidance has been poor. Those who have not reduced expectations are back loading Q3 and Q4. This afternoon, Hewlett-Packard will announce earnings. They won't be good, but the company is well-managed and all things considered, the performance should be decent. BIDU will shed light on the advertising scene in China. Many analysts are looking to the East for signs of life. Priceline and MGM will shed light on tourism. Overall, these earnings are not likely to influence the market. We have already heard from other companies in their industries. The big number tomorrow will be the initial jobless claims. Unemployment continues to climb and the rate of acceleration is of particular concern. Continuing claims are likely to come in around the 5 million mark. The producer price index should show a decline in prices and the Philly Fed will indicate weakening conditions. I should mention that the FOMC minutes will be released this afternoon. However, they won't have much of an impact since we are hearing from Fed and Treasury officials on an ongoing basis. Option expiration had a negative effect on the market and once the selling momentum established itself, sell programs kicked in. Prices have stabilized today and we are likely to see choppy trading. The market might drift lower into the bell ahead of the jobless claims number, but the selling should be relatively contained. I am short puts and I am watching positions carefully. If this level holds, I will be scaling into new positions next week. The premiums are back up and stocks are near support. That sets up well for put selling in March - IF SUPPORT HOLDS! image

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February 17, 2009

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