Wednesday’s Stock Option Trading Strategy!
Posted by Pete Stolcers on October 24
Buy commodity stock options on support. Option traders that get short this market run the risk of getting whipsawed ala March and August.
Monday and Tuesday the market posted nice gains and we recovered much of last Friday’s losses. Before the market opened this morning, news from Merrill Lynch rocked the financial stocks once again.
Merrill Lynch reported losses of $2.24 billion or $2.82 per share. The expectation was a $.45 per share loss for the quarter on revenues of $3.25 billion. That was a substantial miss and now traders are very worried that the losses are mounting. Within their release, they cited particular weakness in September. GS, BSC, and LEH reported their earnings a few weeks ago and this weakness was not reflected in their numbers. Analysts suspect that their earnings are also suffered in September and they expect big breakdowns when those three report in two months.
So far, if you exclude the financial sector, earnings have shown a 3% growth rate compared to the same quarter last year. The problem is that financials are a huge part of our market.
New home sales fell 8% in September to their lowest level in eight years. Median sales prices were down 4.2% in the past year.
From a technical perspective, the market made a new relative low today. The steep up trend line was breached last week and the market has fallen below horizontal support at SPY 150. The next level of support is SPY 146. That represents the April breakout and it is significant. I am maintaining my “buy the dip” mentality and it is important to let the market find support before taking a position.
Financial stocks have been making money hand over fist during the housing boom, now they are giving some of it back. Once they have taken all of their write-downs and these stocks are beaten down, the market will have a legitimate chance at a sustained rally. I still do not believe that our whole economy is going to topple because of weak housing. Housing only represents 5% of our GDP.
I will continue to evaluate earnings this week. If the market finds support at any of the major levels, I will prepare to get long. Commodity stocks and the companies that service them continue to be my favorite places to get long. No matter what our economy does, these stocks are a global play and they should hold up well.
For today, negative momentum has been established and the market has made a new relative low. I expect a small mid-day rally and then a decline down to the lows of the day going into the close. The overnight earnings announcements look pretty solid and I don’t expect any big downside surprises. Tomorrow’s open should be relatively neutral.
I have not talked much about the conflict on the Turkish/Iraqi border. If this continues to escalate, it might become a concern. We currently have too many conflicts on our plate and the country is divided on our foreign affairs.
