Option Traders – It’s Time To Buy The Dips!

The stock market certainly looks like it wants to head higher. After retesting the lows last week, it has rocketed higher, prompting the bears to cover short positions. We know that more write-downs are likely, but judging from the earnings posted by Goldman, Lehman and Morgan, we might be past the halfway point. The Fed has also made it clear that they will do anything to avoid a financial collapse. Lower mortgage reserves, a low discount window rate, $400 billion in mortgage backed loans and a low Fed Funds rate have all pumped liquidity into the system. This doesn't mean that the economy is going to do an about-face. The unemployment rate is rising and economic activity continues to decline. Today, a dismal consumer confidence number revealed a high level of household pessimism. Tomorrow, we will get a weak durable goods number. I believe the market has staged a great run and it is a little ahead of itself. A decent pullback will present an option trading buying opportunity. The bears are running scared and the market was able to regroup after today's weak consumer confidence number. I believe it will be able to do the same with the durable goods number. Now that we have seen a double bottom and follow-through buying, I have adopted a buy the dip mentality. During the first round of buying, the most battered sectors are likely to see action. Retail, restaurants, housing and financials have staged nice rallies. In short order, those stocks are likely to stall. The cyclical stocks that generate much of their revenues internationally are a much more sound play and they will come to life during the second leg of a sustained rally. We are not quite to that point yet, but I would be looking to take long-term positions in those stocks on any major pullback. Commodity stocks also look very strong. However, there is a chance that money will be rotating out of those stocks and into other stocks now that the market has found its footing. I still like commodities stocks and I feel they should comprise at least a third of your longs. For the rest of the week, be patient and wait for a decent pullback to start scaling and too long positions.

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