Brace For A Weak Unemployment Number – Possible Put Writing Opportunity Tomorrow!

December 4, 2008
Author: Peter Stolcers, Founder of OneOption

Last week, the market was able to post its largest five-day rally since 1933. It shouldered a dismal durable goods number and a weaker than expected GDP number. Much of that rally was stripped away by the huge decline on Monday. Tuesday and Wednesday, the market shrugged off bad economic news and it rallied into the bell both days. Yesterday, ISM manufacturing came in lower than expected and the Beige Book revealed widespread weakness across the country. In both cases, the market declined on the news intraday and quickly reversed. Many analysts feel that a support level has been established and that all of the bad news has been factored in. I am inclined to agree, but this does not mean that I’m getting long. First I need to see a sustained rally with follow-through and the market needs to convincingly break through resistance levels. This morning, major interest rate cuts around the world helped to support the market. The ECB reduced rates by .75% to 2.5%. The Bank of England cut by 1% and Sweden cut by 1.75%. Normally, these actions would result in a massive rally. Unfortunately, they demonstrate just how dire the situation has become. Earlier in the week, Korea, Japan and China released weak economic data. Without a doubt, we are in a global recession. Initial jobless claims fell by 21,000 and that was better than expected. However, the continuing claims jumped to 4.09 million, a 26-year high. Yesterday, the ADP report projected a loss of 250,000 jobs in November. That was much higher than 205,000 analysts had projected and it represents the most layoffs in seven years. Tomorrow's Unemployment Report could be much weaker than expected. I believe the impact of the credit freeze in September created a spike. Bailouts are pouring in from all corners as the Big Three plead their case. Companies from almost every industry are lining up for handouts. This week, Ben Bernanke said that the Fed might consider buying US Treasuries. That is an outright statement that he is willing to turn on the printing press. This can easily create hyper-inflation and the dollar will get crushed. Our national debt is ballooning and states are knocking on the Fed's door. Five of them have run out of unemployment funds and California is running an $11 billion deficit. Governor Schwarzenegger projects that the deficit will grow to $28 billion in a few years. This is common across the nation and I know Illinois is in bad shape as well. Retail sales have been horrible and many analysts believe that Black Friday's number was the result of massive discounts. Consumers are only buying what they need and personal consumption has hit a 20-year low. Over 70% of our GDP is driven by consumption. Credit card companies are also reeling in credit limits and shoppers will be forced to spend less. It is hard to stay optimistic with all of this gloom and doom. I am long-term bearish, however I feel that year-end support could help this market tread water. With that in mind, the best strategy is to sell out of the money puts (or put credit spreads) on stocks that have formed a solid base. Look for companies that have strong balance sheets and good cash flow. The option implied volatilities are at historic highs and you will be well rewarded for your risk. The Daily Report has excellent bullish candidates that fit this bill. I believe the market will drift lower throughout the day and traders will not want to get long ahead of the Unemployment Report. If the number comes in better than expected and early market losses are erased, take advantage of the opportunity and sell puts. If unemployment spikes much higher than expected, step aside and wait for an opportunity next week. image

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