Soft Week Ahead – Be Patient – Buy The Dip.

By recent standards, this has been a very quiet week for option trading. The S&P 500 futures are trading near last Friday's high of the day. Throughout the week they have been in a tight 20-point range. This compares to last week where we had three trading days with a 40-point range. Throughout the week, economic numbers came in pretty much as expected. Durable goods were weak, the final GDP was not revised, housing numbers were dismal and consumer confidence was down. Today, the PCE deflator came in lower than expected. That is good news since it is the inflation gauge of choice for the Fed. We have witnessed progressive action by the Fed. The market was relieved to see that demand for the Fed’s mortgage backed loans was relatively light on Thursday. This indicates that financial institutions are not scrambling to add liquidity. The market has already priced in another .5% rate cut by the next FOMC meeting and I feel that it might be getting ahead of itself. The ECB is standing firm on their interest-rate policy and every time we lower our rate, the dollar gets crushed. Last week, we saw earnings from Goldman, Lehman and Morgan. The market was relieved and it sparked a huge rally in financial stocks. The investment bankers seem to be in decent shape, but a huge part of that rally was short covering. Financial stocks started to give back their gains and they are drifting lower. In two weeks, major banks will release their earnings and there is speculation that many of them will post weak results and cut dividends. The earnings next week will be very light. BBY, MON, RIMM and MOS are a few stocks of interest. During this Q1 earnings lull, the market action will be determined by the economic releases. Chicago PMI, Construction Spending and ISM will be important, however they will take a back seat to the Unemployment Report. On Wednesday, the ADP Employment Index will give us a sneak peek. I don't feel it is a very reliable indicator, but the market will trade off of the number. If the unemployment continues to increase, the subprime crisis is likely to spread. This will put pressure on the banking stocks ahead of their earnings and a worst case scenario will be priced in. The market has formed a double bottom at the 20% correction level. I feel that support will hold and the market will spend the next few months sifting through news. There will be nice rallies and big drops within the SPY 125-140 range. This sets up well for subscribers of the Daily Report. I am finding that there are many individual stocks that have tremendous strength and weakness. There are general sectors that look bullish or bearish, but the opportunities are much more compelling when you drill down to specific stocks. If you have not tried the Daily Report, you should check it out.

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