Tuesday’s Stock Option Trading Strategy – Stay long commodities, tech, Chinese ADRs

October 2, 2007
Author: Peter Stolcers, Founder of OneOption

Monday was an dream. soared as the Dow Jones Industrial Average rocketed to a new all-time high. The other indices rallied and are within striking distance of the same. The exception is the NASDAQ which is still at about 50% of its peak in the year 2000. The NASDAQ has been outperforming the other indices on a relative basis recently. The S&P 500 needs help from the financials. The large banks and broker-dealers are starting to reverse their recent decline. Even bad news from Citigroup and UBS did not weigh on those shares. After announcing that big write-downs would be taken on subprime loans, both stocks rallied yesterday. This morning dismal housing numbers are being well received and housing stocks are bouncing from a deeply oversold condition. Many retail stocks are also bottoming out. There were a few takeovers this week and that is also spreading optimism. Overnight, global markets put in a strong showing. Fear is disappearing from this market. I suspected that the economic weakness that spooked the Fed won't reveal itself for a few more months. In the meantime, the market will rally off of historical data that still looks strong. We will be able to draw one of two conclusions in a few months. 1. The Fed panicked and the housing slump was absorbed by global expansion. The interest rate ease caused inflation. 2. The Fed’s crystal ball predicted a housing related slowdown and the preemptive ease helped soften the blow. At this juncture it almost doesn't matter. The market has a low interest rate environment and global expansion continues to drive profits for international companies. If our economy is on sound footing, the interest rate ease will fuel a huge rally. If we start to see signs of economic weakness, the market will rationalize that another rate cut is around the corner. Don't be fooled into thinking that our market is at an all-time high. The rest of the world can buy our stocks and a discount to the July high because the dollar has been crushed. Travel outside of this country and you will see how dramatically our purchasing power has dropped. Stay long commodity stocks, tech stocks and Chinese ADRs. The action will quiet down as Friday approaches. The SPY might challenge the “old high” today. image

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