The Market Bid Is Back – Don’t Buy Here – Wait For A Dip!

April 4, 2008
Author: Peter Stolcers, Founder of OneOption

Finally, the market has shown signs of life. Early in the week, financial stocks found support. Lehman was able to secure $3 billion of additional capital under reasonable terms. They confirmed that they did not need the capital, but they wanted to strengthen their balance sheet and dispel any notion of a liquidity problem. Thornburg Mortgage also received a takeover bid. Tuesday morning, UBS and Deutsche Bank announced additional capital investments. The market loved the news and it posted one of its best one-day gains in the last five years. This rally was viewed with a skeptical eye since all of the recent one-day surges in the last two months have failed. Throughout the early part of the week, economic releases supported the move. The ISM manufacturing and services numbers came in better than expected and the ADP employment index also beat expectations. Thursday morning, the market got its first test when the initial jobless claims came in much higher than expected. Furthermore, in his testimony before Congress, the Fed Chairman expressed that the probability a recession has increased. Surprisingly, the market was able to shrug off the news and it held the gains from Tuesday ahead of the Unemployment Report. I mentioned to Daily Report subscribers on Thursday that a weak number was likely. The dismal initial jobless claims number and Chairman Bernanke’s statements set us up for a disappointment. That guess turned out to be right and unemployment rose to 5.1%. Nonfarm payrolls dropped by 80,000 in March, the largest decline since March 2003. After the first few hours of trading, the market has been able to hold up. This is a monumental accomplishment and it indicates that a "bid" has returned to the market. A few weeks ago, we would have seen a melt down. Before we get too excited, let's recap some of the news. UBS took and additional $19 billion in write offs and Deutsche Bank wrote down an additional $4 billion. Thornburg was taken over for pennies on the dollar based on its share price a few months ago. The ISM numbers showed improvement, but they are still below 50 and it indicates contraction. The ADP employment index tends to exaggerate the employment picture and that was confirmed by Friday's number. If people start losing their jobs, the subprime crisis is likely to spread to other loans. Keep in mind that the largest mortgage reset comes in June/July. My conclusion is that we will be stuck in a trading range for the next few months. That range is from SPY 125 – 145. I will be selling near the high end of the range and buying near the low end of the range. This recent market strength gives me confidence that I did not have two weeks ago to buy at the low end of the range. All traders have witnessed this and I believe the double bottom will serve as long-term support provided economic conditions slow but don’t deteriorate quickly. The economic and earnings releases next week are extremely light. The economic highlight would have been the FOMC minutes, but they've been so vocal that no new information will be gleaned from the release. On the earnings front, GE announces their results on Friday and they could pave the way for other industrials. First-quarter earnings take off in two weeks and the banks will dominate the early action. Look for a choppy week of trading ahead. I believe that a “ buy the dip” mentality is the way to go. Make sure to take profits as the market approaches resistance levels. This week I am running a special offer on the Level 3 Option Report.I started the service two years ago and it is up almost 100%. During that same period, the market has been flat. Subscribe before Monday and save 25%. The special offer is $142.45/quarter (regular price $189.95/quarter). Maintain your subscription and continue to save. I currently hold 2 bullish positions and I am ready to put the other 50% to work. image

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April 3, 2008

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