Do Not Buy Into This Rally – The Unemployment Report Was Horrible – Possible Reversal!

February 6, 2009
Author: Peter Stolcers, Founder of OneOption

Do Not Buy Into This Rally! I had to get today's comments out before the open today because of the reaction to the Unemployment Report. Almost 600,000 jobs were lost in January and this is the biggest drop in payroll in 36 years. The unemployment rate jumped to 7.6% and the acceleration is unprecedented. Analysts had expected a loss of 525,000 jobs and they undershot by a wide margin. Furthermore, yesterday's horrible initial jobless claims number is not reflected in today's number. That means that the conditions are continuing to deteriorate. The US has lost 3.6 million jobs since December 2007. January's unemployment was revised higher and so was December's figure. The market is rallying because a stimulus package will be pushed through. Republicans will be blamed for stalling the process when immediate help is needed and they are being pressured. There is so much pork in the stimulus package that it will do little to revive the economy. It will put us much farther into debt and the dollar will get crushed. I fear that we will not be able to finance the $3 trillion we need for the combined bank bailouts and stimulus package. As the US Treasury goes to market, the yields will rise in the cost of capital will increase. It's a simple supply and demand scenario. When you start flooding the market with new debt, the appetite for it goes down and investors require more incentive. Budget deficits are already at extreme levels and we have not even mentioned the dire condition of our states. They are running huge deficits and that is a Constitutional violation. Some have run through their unemployment benefits and many are on the brink of doing so. High unemployment levels reduce tax revenues and they increase transfer payments in the form of unemployment benefits and welfare. This double-edged sword alone will destroy our budget deficit and now we are handing out tax rebates on top of it. A month ago, Standard & Poor's warned that the US is in jeopardy of losing its AAA bond rating. We are getting closer and closer to that happening and the dollar is weakening. A weak dollar is inflationary and commodity stocks will benefit. That is why you've seen them rally over the last few days. My scenario did not play out. I felt that we would see a big decline on this release and that we would test SPY 80. The hope of a well conceived stimulus package would keep a bid under the market. I wanted to sell puts into that decline, with the idea that the market would tread water until expiration. Instead, we are seeing an immediate rally on horrible news and the stimulus package will not provide economic growth. If you recall each potential interest rate cut supported the market last year. As soon as the rates were cut, the market would tank. I feel the same is in store for us this time around. Once that stimulus package gets approved, look out below. I have my short put positions on and I'm comfortable with them for the time being. I sense that this is going to be a long two weeks before expiration. I do not like what I see in the market and the news couldn't be much worse. Nine out of ten sectors have missed earnings and the guidance has been dismal (when it has been provided). I am not adding new short put positions; I am sticking with what I have. I believe any early rally today will be a shorting opportunity. I don't care how great the stimulus package is, the Unemployment Report was horrible and it will eventually scare the heck out of traders heading into the weekend. Keep a very close eye on the bearish watch list today and look for opportunities to short the stocks at the top of the Live Update table. Let the early rally run and be ready if you see signs of a reversal.

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