Santa Leaves A Lump Of Coal – This Is A Bearish Sign!

December 29, 2008
Author: Peter Stolcers, Founder of OneOption

The market continues to slip and Santa Claus has left a lump of coal in our stockings. Since the FOMC rally two weeks ago, the market has been in a steady decline. Typically, portfolio managers allocate cash at year-end to "goose" the market and enhance returns. In this case, they would be softening the blow from 2008. The buying has not materialized and the market has easily slipped to a major support level at SPY 85. Bad news is starting to weigh on the market. A drop in durable goods orders and a weak GDP were reported last week. Fighting in the Middle East has broken out and that has spooked investors. Many feel that the US can't financially afford to help Israel. Skirmishes between Pakistan and India are adding to the global unrest. One of the last remaining take-over deals looks vulnerable today. Dow Chemical lost a $17 billion deal with Kuwait and that jeopardizes its ability to buy ROH. If Dow Chemical could have backed out on the deal, they would have long ago. Commodity stock prices have tanked and they are paying a hefty premium. Unfortunately, the deal was structured in the favor of ROH and it will cost Dow Chemical a bundle if they back out. I highlighted this short in the Daily Report two days ago and I hope you got in. The stock is down $14 today! Earnings and economic releases are very light this week and they should not influence trading. The momentum favors the bears and it is unlikely that we will see a Santa Claus rally. If that were in the cards, we would have seen buying on Friday and today. When the market does not rally into year-end, it signals weakness ahead. In today's chart, you can see the recent market decline. Also notice that the VIX is starting to creep higher. I still like selling OTM puts on stocks with relative strength. Given today's news, I also like selling puts on energy stocks. Keep your powder dry and wait for a breakout above SPY 91 or a breakdown below SPY 84. Place stops on all of your naked put positions. Buy the puts back if the stock breaks support. image

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