Buy A Handful of Stock Options and Exit Before the FOMC.

April 28, 2008
Author: Peter Stolcers, Founder of OneOption

The market is trading slightly higher this morning on news that Mars and Warren Buffett are teaming up to buy Wrigley. There's nothing like merger Monday to put a positive spin on stock prices. This week, we will get an onslaught of economic data. I believe it will continue to show weakening economic conditions. However, that is already been factored in to prices. I also believe that the Fed will lower interest rates .25% on Wednesday. The rate cuts have been relatively ineffective and banks have been able to raise capital. Inflation is a concern and the Fed has thrown in the kitchen sink. They only have a handful of bullets remaining and they need to save them. In June and July, we will get another round of mortgage resets. Depending on the depth of this economic downturn, we might see another spike in foreclosure rates. Ultimately, I see stable interest rates as a positive. The Fed will only say that it is done lowering rates if it feels confident that the credit crisis is contained. The initial reaction will be negative and I think that will set up a nice buying opportunity. I believe the unemployment number will be benign since the last three initial jobless claims numbers have been mild. While there are many earnings releases this week, there aren't any mega-cap stocks that will be posting numbers. I believe the economic news will have the greatest impact on the market. Today, the SPY is breaking out above intermediate resistance at 140. This is a positive development. Major over head resistance lies at SPY 144 and any rally will quickly hit stiffer headwinds. Pullbacks present a much better buying opportunity. If by chance the Fed lowers interest rates and it leaves the door open for future rate cuts, take warning. The market will rally on the news and it will set up a good selling opportunity. This scenario tells me that weak numbers lie ahead and they are still worried. The probability of this outcome is less than 20%. I would only get long this breakout in small size. Take profits along the way and exit ahead of the FOMC. For subscribers, I like the 4 heavy equipment stocks at the top of the Daily Report Live Update page. image

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