Option Trading Strategy – Light On Shorts – Wait For Market Support – Buy The Dip.

April 14, 2008
Author: Peter Stolcers, Founder of OneOption

This week will be laden with earnings. Right out of the gate, WB said that it will raise $7 billion. They had a disappointing quarter and they just had to raise $3.5 billion last quarter. They cut their dividend in half and analysts have been expecting that for the entire financial sector. The company lost $.20 per share compared to a gain of $1.20 last year. Deutsche Bank is looking to sell $20 billion of leveraged buyout debt and Credit Suisse is expected to write-down $5 billion in the first quarter. Citigroup is also trying to sell around $12 billion of debt to buyout groups. The banks are scrambling to strengthen their balance sheets. The write-downs seem to be accelerating and that would be consistent with GE's comments last week. Supposedly, they had difficulty unloading debt and financing issues came so late in the quarter that they could not preannounce. The only good news is that the banks have been able to secure financing. They have marginally leaned on the Fed’s outstretched hand and the auctions have been under subscribed by a healthy margin. This morning, retail sales came in weak, but better than expected. Retailers posted .2% rise when a flat number was expected. Tomorrow, the PPI will be released. Bulls want a small number so that the Fed can continue its loose monetary policy. High inflation would force the Fed to quickly hike rates once the financial crisis has passed. Wednesday, we get the CPI, housing starts, industrial production, capacity utilization and the Beige Book. That will be the most significant economic release day this week. On the earnings front, BHP, MTB, MI, NTRS, STT, and USB will announce before the open. BHP should benefit from higher coal and base metal prices. The rest of the companies are all banks and we can expect lame results. However, two of the stocks in the group (STT and NTRS) have a little to no subprime exposure. I like both stocks and they will be a buy once the financial crisis passes. After the close tomorrow, CSX and INTL, STX and WM will release earnings. Intel and Seagate have been beaten down and formed support levels. Any ray of light could boost tech stocks and I believe worst-case scenarios are built-in to the stocks. The news this week is likely to be depressing. Banks are posting weak numbers, but capital inflows might soften the blow. More dividends are likely to be cut, but that is expected. The threat of a financial collapse is subsiding and worst-case scenarios have been factored into earnings. The market has been very resilient and the bulls are getting their confidence back. Last Friday's decline was nasty but it came on light volume. It was more a lack of buying than aggressive selling. Expiration week could have a negative bias. If the market gains downside momentum, sell programs will be executed. Financial stocks could get the ball rolling as they continue to post weak earnings. Dismal economic news is likely to fuel this decline. By the middle of next week, the financial stocks will have reported and I believe the market will stabilize. This will be a great entry point for commodity stocks. If you are going to trade the short side, go small and been nimble. I believe that the underlying bid to the market has returned and that violent snapback rallies are possible. Don’t misinterpret my bias. I am not bullish, I simply prefer to but the dips at this stage. The market is likely to stay in a range between SPY 128 – 138 for the next few months. image

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