Snap-back Rally Should Last Through Option Expiration – SPY 110

October 14, 2008
Author: Peter Stolcers, Founder of OneOption

I have to keep this brief because I want to get my comments out early. Yesterday, we saw the biggest one-day rally ever. The buying continued right into the bell and sellers pulled their offers. The end result was an "air pocket" rally. The last part of the move was similar to the "air pockets" we've seen on the way down. Europe set forth a plan to bail out financial institutions. They infused capital and set guidelines. The expectation was that the US would follow suit. This morning, we learned how some of the $700 billion would be deployed. The plan is very similar to what Europe adopted. $250 billion will be invested in the largest US financial institutions. The government will hold preferred shares and they have imposed certain restrictions on executive compensation and dividends. This information was taken from CNBC's website Revised Rescue Plan at a Glance • US Treasury will buy up to $250 billion in senior preferred, nonvoting shares in financial institutions. • Maximum purchase will be $25 billion per institution. • Nov 14 deadline for banks to participate in equity purchase program. • Preferred shares to pay 5 percent a year for first 5 years, 9 percent after 5 years. • Firms in program must adopt Treasury's standards on executive pay and corporate governance. • Compensation for top execs won't be tax deductible above $500,000. The advantage of this plan is that it provides immediate capital to banks. The Fed won't waste time sifting through assets trying to price them. Financial institutions need cash now and the plan also includes federal guarantees on new bank debt for three years. This will help to free up the current credit crisis as banks start lending to each other. The market is deeply oversold and it has more than factored in weak economic conditions. A financial collapse was partially priced in and now that credit markets are regaining their footing, that is less likely. I believe this snap back rally will have legs through option expiration. The market got a little ahead of itself this morning. After a 40 point S&P 500 rally, sellers decided to take profits. After testing the downside, the market has been able to find a bid. I believe we will see an afternoon rally and that momentum should last for a few more days. I believe we will find resistance at SPY 110. Earnings are upon us and I believe worst-case scenarios have been factored in. The market could rally off of earnings this week. I am not long-term bullish, I am long-term bearish. This bear market rally is tradable and it will force the shorts to cover. Once this move stalls, it will be time to get short. Trade from the long side and use stops. My short-term market forecasts have been spot on and I warned you last Friday that we would see a capitulation rally. Stick with tech stocks and agriculture. image

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