Let The Market Pull Back – Then Buy Stock Options On Commodity Stocks.

Yesterday, the market was able to hold its own after a nasty decline last Friday. Overseas markets were generally higher (with the exception of China) and that gave us a clean slate to work with this morning. A number of banks posted their results this morning (STT, NTRS, MI, USB, MTB) and four of the five are trading higher. Ironically, the stock with the best performance is the one that is down. STT posted EPS of $1.35, a 69% gain in net income. It took an unrealized loss and that news is weighing on the stock. Here are the other results: NTRS EPS up 22% (excluding one-time gains) to $1.01, MI EPS up 33% to $.56, USB EPS – 4% to $.62, MTB EPS up 15% to $1.82. These are good results! Judging from the put buying in these stock options, the market is prepared for worst-case scenarios. When they fail to materialize, the stocks rally. JNJ and BHP also posted nice numbers. The market has also factored in weak economic data. As a result, it was able to rally after a "hot" PPI number. The core wholesale inflation rate was .2%. Inclusive of food and energy, it was a whopping 1.1%. Oil is making a new all-time high and so are other commodities. For the time being, the consensus is that the Fed will still have some wriggle room to lower rates as long as the core rate does not heat up. China is fighting inflation by raising interest rates. As a result, its market was down 5% overnight. Since October, it has lost 40% of its value. After the close, Seagate and Intel announce and they could set the tone for the tech sector this week. Google announces earnings after the close on Thursday and that will also have a major impact on tech stocks. I feel that the results might be soft for these companies, but the stocks have been beaten down and they rest on support levels. Hence, the chance for a rally is greater than the chance for a decline. These stocks release earnings tomorrow before the open and they could have a positive impact: ABT, KO, ITW, JPM, NITE. These stocks release earnings tomorrow before the open and they could have a negative impact: AMR, JCI, MTG, EDU, PJC, WFC. Overall, I like the odds for a positive reaction to the pre-open earnings. The economic calendar is heavy tomorrow and we will see if the market can continue to dodge bullets. Tomorrow afternoon, the Beige Book will be released and that will give us some insight on economic activity on a regional basis. We are not out of the woods yet. The market will have many negative news items to deal with this week and option expiration could fuel a downside move if we start to slip. The earnings news this morning was surprisingly good. The regional banks are actually making money and the decrease in net income was acceptable. In the early going, they are not a new source for concern. I am in cash and waiting for a buying opportunity. This SPY 133 level is a long term horizontal support area that dates back to March/August 2007. The bulls would like to see it hold. I believe the SPY 130 level represents stronger support. After an initial rally, prices are slipping. Record oil prices and a 1.1% rise in PPI are weighing on prices. The highs for the day are in. If we make a new daily low this afternoon, the market could slip into the close.

Daily Bulletin Continues...