Monday’s Stock Option Trading Strategy!

There is a common saying, "When Santa Claus fails to call, the bears will roam Broad and Wall." That is the case this year, and Santa Claus has left a lump of coal in everyone's stocking. They year-end anomaly has been substantiated by Yale Hirsch (The Stock Trader's Almanac). Over the past 20 years, 65% of the time the market rallies during the last five trading days of the year. I believe this exists because people are generally happy during the holidays (so they invest), fund managers are trying to mark up their portfolios so that they can generate bigger bonuses and there is end of month fund buying. In light of diminished trading activity, no one wants to stand in the way of this seasonal pattern. However, when they do, it means that the market has natural sellers who want to exit their stock positions and they take advantage of the rally. I believe the first half of the year 2008 will be weak. As noted in the Stock Trader's Almanac, election years where a change in party is expected are historically weak during the first five months of the year. As it stands, the Democrats have a substantial lead in the polls. More importantly, the economic data has been weak and inflation is on the rise. I believe the Fed is handcuffed and this economic cycle will have to run its own course. Friday, we will get the Unemployment Report. Initial and continuing jobless claims have been weak the last two weeks and I believe unemployment is on the rise. I expect the market to have a negative reaction. During the first half of 2008 I also believe that financial institutions will still be taking large write downs and that the depth of the financial crisis will still be unknown. On a positive note, money can still be made on the short side of the market. In fact, the market tends to go down twice as fast as it rallies. I will do my best to try and catch some of these moves. May your year be filled with health and happiness!

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