The Bears Have The Ball And They Will Test Support At SPY 85!

Yesterday, the market rallied off of an early low. Initial jobless claims were much weaker than expected and continuing claims now stand at 4.4 million (a 26 year high). By late afternoon, the bulls got tired and sellers pushed the market down. As I pointed out in yesterday's comments, the market should have been able to rally above SPY 90. That is a minor resistance level and any sustained rally should have blown right through that level on its way to SPY 100. SPY 100 represents formidable resistance and given this week's action, I don't believe it will be penetrated by year-end. The selling spilled over to foreign markets and Asia (-5%) and Europe (-2%) posted overnight losses. This morning, we learned that the Senate rejected the Big Three bailout plan. However, the Bush administration said they were ready to step in and prevent an auto industry collapse. They will most likely tap into the TARP fund. Investor confidence was shaken when we learned of another huge securities fraud case. Bernard Madoff embezzled billions of dollars from his hedge fund. This could spark additional hedge fund redemptions. Retail sales fell 1.8% in November and those results were in line. Unfortunately, the revenues were generated by deep discounts and retail profit margins will be slim. The market rally in the last two weeks has not scared anyone. Bears are still able to hold their short positions and it seems impossible for the market to generate a decent rally when bad news lurks around every corner. Next week, earnings from RIMM, FDX, GS, MS and BBY could weigh on the market. Poor results are already factored in and most of them have already warned. Option expiration could have a negative bias as we drift lower. Normally, the highlight of the week would be the FOMC Policy Statement on Wednesday. We no longer wait an entire month for them to disclose their intentions. They have been making daily statements and the kitchen sink has been thrown at the credit crisis. What else can they say or do? The huge unemployment figure from last week will weigh on the market. The weekly jobless claims number confirms that conditions are deteriorating rapidly. The credit crisis will spread as consumers default on loans. State and federal revenues depend on full employment and the deficits on both levels continue to grow. The market low from November attracted buyers, however that bounce was very short-lived. The bulls have given up the ball and now the bears will try to run with it as they test support at SPY 85. This tug-of-war could result in a tight trading range. As I have been mentioning, the best strategy is to sell out of the money puts or put credit spreads on stocks that have formed a solid base. Make sure the strike price is below the support level. The stock will have to break support before the position can get into trouble. If that support is breached, buy back your puts. The option premiums are rich and you will be well rewarded for taking on the risk.

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