Daily Stock Option Trading Strategy

The bid to the market continues to surprise me. Yesterday we got a "hot" PPI number and the market was able to rally after the release. Overnight, we saw global market weakness and it looked like we might open lower today. The CPI came in "hot" and it exceeded expectations by .1%. Consumer confidence fell to its lowest level in 2 years and the market dismissed that economic indicator as well. Norway and Switzerland can now be added to the list of countries that have recently raised interest rates and that will put additional downward pressure on the dollar. Single digit earnings growth is expected this quarter and there is not a catalyst to drive stock prices higher. I feel that the market is getting heavy and it has shouldered all of the bad news it can take. If you look at the chart you can see the SPY 141 resistance level. The longer the market stays below that level, the more significant the resistance. Also note the blue dotted lines in the chart. You can see that the market made a lower low on the second wave of selling and the bounce was weaker. Sellers were more aggressive this time around and they started hitting bids before the market could make another assault on SPY 141. The message is pretty clear to me. The housing market is weak and the Fed will not be in a position to help out by lowering rates. This will have to cycle through the economy on its own. If you wonder how important housing is to the economy, here is an interesting statistic. From 2001 - 2006, 50% of US job growth came from this industry. That includes lending, sales and building. Sub-prime may be a small part of the total picture, but there is a ripple affect. There are many more marginal home owners with adjustable rate mortgages that will convert from a low 3-year fixed rate to an ARM in the next year. This is certain to affect consumption. I am long puts and feeling more confident with every day. I have been gradually adding to my long put positions and at SPY 138, I will have a full position. I will take partial profits at SPY 135 and I feel SPY 132.50 represents long-term support. I will keep my stop at SPY 141.

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