Fed Bailout Rally Will Set-up A Short!

September 25, 2008
Author: Peter Stolcers, Founder of OneOption

There's an old saying on Wall Street, "buy the rumor - sell the news." I believe “buy the rumor” is what we are seeing today and we are setting up for “sell the news” next week. Traders believe that a bailout will be approved over the weekend and they don't want to get caught short. This rally will exhaust itself and it will set up a great shorting opportunity. We are not going to experience a financial crash, but that's hardly great news. Let's not forget that financial institutions are in dire straits. The unemployment rate is rising and consumers are up to their eyeballs in debt. The sub-prime crisis is spreading and someone still has to pay for poor lending decisions. The Fed doesn’t know what it will find once it opens the books. The fact that more firms want to come under the TARP is a little concerning and it makes me think that the problem is worse than expected. Capital is very difficult to secure and as demonstrated by Warren Buffet's $5B stake in Goldman Sachs, it comes a stiff price. When Bank of America cuts off loans to McDonald’s franchisees, you know its getting tough. Lending practices will tighten until the Fed can get its arms around the problem. Today, durable goods came in much lighter than expected and continuing jobless claims increased. The most significant piece of economic data will be released next Friday. If unemployment continues to climb, the market will take a hit. I am in a trading mode. Prices will climb higher right into the closing bell Friday. Once this rally stalls, it will set up a nice shorting opportunity. SPY 128 represents resistance and I will start shorting from that level. Be nimble. image

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