Stock option Trading Strategy – Long commodity stock calls, long retail and restaurant puts.

I am posting today’s market commentary just after the open. As I mentioned yesterday, new lows in the afternoon would precipitate selling right into the close. As we’ve seen before, once the selling momentum builds, buyers put their wallets back in their pocket. At its worst point Thursday, the S&P 500 futures were down 50 points. By the end of the day, the market was able to recapture 14 of those points. Before the open today, the futures were down and they almost tested yesterday’s lows. A solid GDP number might have saved the day. The economy is growing faster than expected and inflation moderated. By the open, the market had rallied back to unchanged. Without question, liquidity is drying up. Long-term that is healthy for the market since it takes excess and inefficiency out of the system. On a short-term basis, it can be a painful process for those who are overexposed. The warning shots were fired in February and I believe that traders have been adjusting their risk. The magnitude of this one-day drop is similar to the one we saw in February. I believe the same trading pattern could repeat itself in the course of the next two months. The market should rally next week (or at very least find support) from this oversold condition. End of month buying will result in a bid as pension funds place money. The Unemployment Report will be released next Friday and that has been bullish every month this year. The nation has full employment and hourly wages are outpacing inflation. The market is likely to bounce. That move will exhaust itself and a retest of these recent lows is likely. It is conceivable that the market might test the SPY 146 breakout level. That represents significant support and that level must hold in order for me to maintain my bullish bias. It may take a couple of months for the market to assess the extent of the lending issues. By October, I’m expecting confidence to return to the market and I feel the traditional end of year rally could unfold. There will be some good buying opportunities over the course of the next two weeks. Stay with companies that have held up well and that released solid earnings. I am long commodity stocks since the global expansion picture remains intact. I am short stocks that rely on U.S. consumers. Retail and restaurants are my favorite groups. I expect choppy, volatile two-sided action today. The SPY 146 level should keep things from getting ugly today. If the market can avoid a new intraday low this afternoon, there is a good chance that it will finish unchanged or slightly positive. Don’t expect a huge snap back rally going into the weekend. There are new pieces of information that will take time to digest. By the middle of next week, I feel the probability for a rally is good.

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