If Today’s Low Holds – Stay Long Commodity Stock Options

May 8, 2008
Author: Peter Stolcers, Founder of OneOption

Yesterday, buyers decided to put their wallet back in their pocket. There was not much news to justify the decline. Productivity increased and that pushed unit labor costs lower. That is a good sign for employers and it eases inflationary pressures. The downside to that number is that the average hourly workweek decreased. The bigger issue is that oil rallied to a new high. That move was surprising given the build in oil inventories. If you watch the recent market action, you will see that oil and equities are inversely correlated. Once the downside momentum was established, the market continued to decline. I have been encouraging you to keep your size small during this rally. If you were in commodity stocks, the damage should have been minimal since they held their value well throughout the day. I still believe that commodity stocks are the place to be. Yesterday's decline needs to be a "one off" event for the bulls to keep their confidence. The market has rallied to a resistance level and there is not enough good news to push it higher. I have been mentioning that the headwinds will be blowing strong as the market approaches SPY 145. This morning, many US retailers posted better than expected sales in April. With the tax rebate checks coming in, retail should hold up fairly well. I am not bullish on this sector, but that strength should help to support the market. Financial stocks took it on the chin yesterday. Dismal news from FNM, UBS and LM reminded traders that this sector is far from out of the woods. After the close, AIG announces earnings and speculators believe that they will need to raise additional capital. This sector has rebounded nicely from its lows, but I believe it will stall. The banks might have contained the damage, but it will take them a long time to regain momentum when consumers are running scared. They have also diluted ownership by raising capital. This morning, initial jobless claims fell more than expected and that supported the market. Solid employment will keep this economy from deteriorating. Oil is also down slightly and that is helping as well. I believe the bears took their shot on the open today and they could not generate enough panic to push the market lower. Consequently, the market will grind higher and try to recoup some of yesterday's loss. I believe the market will have a positive bias today. If by chance a new low is established this afternoon, exit long positions. This would not be a good sign and the recent breakout will have failed. Commodity stocks are still my favorite play. I group shippers, oil drillers, oil service companies, fertilizer producers and steel producers into that category. image

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