Thursday’s Stock Option Trading Strategy!

The FOMC produced volatile option trading conditions. I still believe this is the time to buy call stock options on tech and commodity stocks. Today, the market is nursing a hangover after yesterday's rate cut party. Traders liked the notion of lower interest rates, but they did not like the Fed’s rhetoric. The FOMC announcement let traders know that future rate cuts should not be expected. The Fed made these comments because it sees signs of inflationary pressures and economic stability. The monster.com and ADP employment indices showed employment strength and that was confirmed today by the jobless claims. If the unemployment number comes out as expected, I believe the market will rally. Today, the ISM showed that manufacturing continued to grow albeit at a slower pace. The PCE showed that core inflation was growing at 1.8% and that is the Fed’s target rate. Real disposable incomes rose 5% and real spending increased .6%. These numbers show that consumers still have purchasing power despite drags from housing and energy. Analysts raised concerns over additional subprime write-downs. They are also questioning whether some of the largest financial institutions will have to cut their dividend to finance these losses. During the go-go lending days in the last five years, financial institutions made tremendous profits and now they are being forced to give some of them back. Each time the market pulls back, the decline a lead by financial stocks. Once support is established, other sectors rally the market back to its prior relative highs. I believe that financial stocks are coiling like a spring. Eventually, they will establish their losses and when money starts to flow back into these stocks, the market will jump higher. I view the Fed's actions and comments as bullish. The economy is fine and the excess liquidity that was caused by years of loose monetary policy needs to be "worked off". The Fed does not need to keep pumping more money into the system to the detriment of the dollar. I still believe that a year-end rally is in the cards and I like this buying opportunity. I like tech stocks (MSFT, NVDA), drillers (ATW, DO), miners (PCU, RIO), and agricultural stocks (POT, MON, MOS). These groups are holding up very well and they will lead the next rally. This market is tough to call. All of the gains from yesterday have been taken back and the FOMC has no net affect. I have to temper my bullishness. I feel that the market could easily snap back today, however, it has had a habit of continuing in the direction of early momentum. If the market establishes a new low after 1:00 pm CT, I would wait for a better opportunity to get long. If the market rallies above SPY 154 in the last hour of trading, I would get long ahead of tomorrow's number.

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