Stock Option Trading Strategy – Time to get short consumer stocks.

I have been bullish on the economy and Friday's unemployment number tainted my bias. I did not expect the dramatic decline this month and I certainly didn’t expect the huge revisions for June and July. For the month of August, analysts were expecting 115,000 new jobs. The actual number showed a decrease of 4000 jobs. That is a whopping 119,000 miss. June and July numbers were reduced by about 81,000 in total. Extremely high consumer debt levels (and I'm not just talking subprime mortgages) will haunt the strength of this economy if workers get laid off. Last week, the Fed invited major homebuilders to share their perspective on the economy and I’m sure Chairman Bernanke got an earful. A rate cut is almost certain after this dismal employment report. Inflation is in check and now the Fed can ease rates without the appearance of a subprime bail out. This week the economic calendar is light with consumer credit, retail sales, industrial production and consumer sentiment on deck. These releases don't pack the same punch and I believe Friday’s Unemployment Report will induce selling pressure until the FOMC. Traders are scrambling to determine if the Fed will cut rates by a ¼ or a ½ point. If the Fed reacts quickly and lowers the rate by ¼ point before the FOMC, it might be viewed as a progressive move and that might be enough to satisfy the market. On the other hand, a ¼ point cut during the FOMC will not carry the same urgency. In that case, the market may decline on anything less than a ½ point cut. There are not many pieces of new information this week to wash that bad taste out of our mouths. Traders are likely to pressure stocks until they get positive news. The market has broken below key support at SPY 145 and I expect continued selling right into the afternoon. I believe you can short any rally. Consumer stocks and any high P/E stock with flat revenues last quarter should be considered for short positions. . .

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