Buy Call Stock Options on Commodity Stocks – Scale In

May 5, 2008

Stocks are taking a breather this morning after a nice run last week. Friday’s Unemployment Report came in better than expected and the market broke through resistance at SPY 140.

Over the weekend, we learned that Microsoft is walking away from their Yahoo takeover bid. That has cast a small dark cloud over the market today. There is also speculation that Bank of America will lower their takeover bid for Countrywide Financial.

Oil is moving higher on political instability in Nigeria and copper is moving higher as a strike in South America looms. Higher commodity prices are weighing on the market.

The Fed’s dovish comments last week should dispel any notion that interest rates will move higher in the near future. This piece of the puzzle is very bullish. Last week, the Fed also increased its credit facilities, making it even easier for commercial banks to add liquidity.

This morning, ISM services came out much better than expected and the number was above 50. That means that this sector is actually growing. The economic releases are light for the rest of the week. The next piece of information that could have an impact is oil inventories Wednesday morning. The market does not like higher commodity prices at this juncture.

From an earnings standpoint, the news has been generally positive. There are not any mega cap stocks announcing earnings this week and the market will be searching for direction. I expect choppy trading with a positive bias.

The momentum favors the upside and stocks should continue to grind higher. We are seeing nice moves in commodity stocks and I believe they represent great long-term value. Some of the speculative “fluff” has been taken out and these stocks looked poised to move higher. The fundamentals are still intact and the long-term trends are powerful.

Get long on this pullback, trade smaller size and be prepared to take profits as the market reaches SPY 145. I believe we will see prices firm up this afternoon.
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