Wednesday’s Stock Option Trading Strategy!

January 2, 2008

Happy New Year!

Weak economic data, spiking oil prices and a semi conductor downgrade are weighing on the first trading day of 2008. The ISM Manufacturing number was much weaker than expected and as I’ve been forecasting, bad news is bad news. The Fed is worried about inflation and they are less likely to ease. Higher oil prices are not helping matters today. Unrest in Nigeria could disrupt oil supplies. The semi conductor stocks have been a market laggard and that downgrade simply puts a little selling pressure on the tech sector.

Tomorrow, we will get the ADP employment index. I don’t hold much credence in the number; however the market does consider it as an indicator. I will wait for the “real McCoy”. The Unemployment Report will be released Friday morning before the open. Initial and continuing jobless claims have been up the last two weeks. If tomorrow’s jobless claims number is weak, I believe traders won’t wait for Friday’s employment number.

Our whole economy is dependent on consumers and I believe they are tapped out. If they start to lose their jobs, there will be a ripple effect that hits mortgages at all levels. US consumers are responsible for 18% of the world’s GDP. We are not as significant as we were five years ago, but we are nonetheless important to the global economy.

In the chart you can see that the market has opened higher and closed lower 4 days in a row. We did not get a Santa Claus rally and is also bearish for the market. It indicates that sellers were hitting bids as the market was trying to stage a year end rally. The SPY has broken below key support at 146, it is below the 200 day moving average and you can see that the down trend is forming as the market makes lower highs.

I hate to start the New Year off on a negative note, but I am getting more bearish everyday. Start by selling out of the money call credit spreads on financials, retail and REITs. I believe the market will continue to deteriorate going into Friday’s unemployment number.
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December 31, 2007

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