Monday’s Stock Option Strategy!

A wild day of option trading materialized just as many stock options were about to expire. Last Friday's bloodbath was nasty. After a week of earnings from financial stocks, the market just couldn't stomach anymore write-downs. As we have seen before, the market suffers a huge one week decline and then it rebounds quickly. This week we will get a broad mix of earnings and I believe good news from other industries will calm fears. Future guidance, not current earnings, is the key. Traders are trying to gauge what lies ahead. The market is likely to test key support levels during the next week or two. The SPY 146 level represents major support. The next area of support is SPY 143. If these areas are tested and they hold, I believe they will present a major buying opportunity. From the last few days in October 2 year-end, the market will be in one of its strongest seasonal patterns and I expect a year-end rally. Expectations are for flat earnings growth this quarter and I believe stocks will easily clear that hurdle. Employment is strong, interest rates are low, profits are growing, corporate balance sheets are flush with cash, P/E ratios are reasonable and inflation is in check. While some of these conditions might be changing, I do not believe that they will deteriorate by year-end. Seasonal forces will take over and the market will rally as it has done twice this year after a big one day decline. I will wait for support before I buy and I would not short this market. Commodity stocks are very attractive and I particularly like energy now that it has pulled back. One of my favorite groups is the deep water oil drillers. I also like oil services companies. These stocks have all been hammered as speculators liquidate their positions. The long-term fundamentals for the stocks are intact. These companies sign multi-year contracts and oil companies are not concerned with day-to-day fluctuations in the price of oil. They believe supplies will continue to be strained in global demand will continue to increase for many years. They are investing heavily in new reserves. Even if oil simply holds the $70 level, these companies will be very profitable. For today, I would wait and watch. The last hour of trading will indicate if there is more selling to come or if prices hold up well.

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