This Rally Should Continue the Next Few Days and Stall Ahead of SPY 92!

The market continues to move higher now that financial stocks have reported. Wells Fargo/Wachovia took a $14 billion loss and the stock is trading higher. Earnings announcements from other sectors have been generally weak and nine out of ten sectors have missed their numbers. The market has been able to shrug off bad news because worst-case scenarios were priced in. A bid has returned and buyers are stepping in. The last week of January tends to be bullish. However, the SPY needs to rally back to 91 in the next two days or January will show a loss. Since 1950, as January goes, so goes the year. This indicator is 91% accurate. Optimism on the bailout is helping the market today. The $825 billion program will include $550 billion in spending and $275 billion in tax credits. Much of the spending will be used for health care, jobless benefits, food stamps and other programs to help victims of this economic crisis. The Fed has doubled the size of its balance sheet to $2 trillion. That represents 12% of our GDP and it is twice as high as the prior record set in the early 80s. We are waiting for the FOMC statement and I'm not expecting anything negative. Fed officials know the fragile state of the market and they won't say anything that could spoil this bounce. They won't make any significant statements until they see Obama's budget in a few weeks. Tomorrow, initial jobless claims will be released. The employment rate will continue to rise and the market is likely to get spooked and recover. Durable goods orders will also be weak and the market expects that. Treasury yields are on the rise and that is troublesome if it continues. It means that our cost of capital is increasing at a time when we need to sell bonds. Countries around the globe are trying to finance bailouts and stimulus programs. I believe this rally could last through the week and I am selling naked puts on stocks I like. That strategy has served me well and my positions are profitable. I will wait for a pullback on tomorrow's open before I add. I already have 75% of my desired exposure. With the Unemployment Report looming next week, the rally will stall as we approach resistance at SPY 92. The market should rally into the close today and after an early dip, it should recover tomorrow. The long-term downtrend is intact and it's important not to get overly bullish on these bounces. That's why I'm selling puts. I also want to take advantage of the decline in implied volatilities.

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