Line Up Your Bullish Option Trades and Be Patient.

Yesterday, the stock market was able to hold its ground after a dismal consumer confidence number. In the last six trading days it has rallied almost 100 S&P 500 points from its low. A move of that magnitude suggests that a double bottom has formed at the January capitulation low. I mentioned yesterday that from an option trading standpoint we were likely to see a pullback on a weak durable goods number. So far, that looks like a good call. This is a great time to identify relative strength. Tomorrow, we will also see a relatively weak GDP number. As the market reacts to weak economic news, it will ultimately find a new support level that is much higher than the double bottom. That support will provide a spring board for a sustained rally. Now that the Fed and earnings from financial institutions have removed some of the uncertainty, the bulls are getting more aggressive. If the market finds early support at SPY 132 (or higher) a rally will materialize in the near future. If the market breaks that support level, it might take a few weeks for us to see the rally. First-quarter earnings are just around the corner. If you strip out financial stocks from the S&P 500, corporate earnings grew at an 11% rate last quarter. We already know that the financials will continue to weigh on that performance. Based on last week's earnings (the key word is earnings), I am expecting better performance from the banks. Cyclical stocks that generate much of their revenue overseas should continue to fare well. I do not believe that this market is ready to race higher. It needs time for the wounds to heal and over time we will be able to assess the magnitude of the subprime crisis. There will be opportunities to get long stocks that are in a long term uptrend. Over the last few months, the market has been like a ball and chain, keeping a lid on these stocks. This is a time to be selective. Start with commodity stocks (DVN, DO, PCU, CLF, MOS, BG, POT), then add tech (RIMM, AAPL, AKAM) and finally add heavy equipment (MTW, TEX, CAT, JOYG, DE, CMI) if a longer term move unfolds. Use these suggestions as a starting point. There are many other stocks that are turning a corner.

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