July 10, 2008 Options Success Market Commentary

Market Commentary is provided by Cashflowheaven.com's Options Success Newsletter.

Wednesday, "bottom pickers" had their heads handed to them--Tuesday's intraday reversal and strong rally into the bell were nothing more than a head fake. Yesterday morning, the market tried to follow through with back-to-back rallies but prices gradually slipped throughout the day and by the close, the walls came tumbling down. The S&P 500 futures closed convincingly below the double bottom formed in March.

This morning, concerns over Fannie Mae and Freddie Mac had the financials reeling with some analysts estimating that a $1 trillion government bailout might be needed. That's not too hard to imagine with foreclosure filings jumping 53% in June (year-over-year) and one out of every 500 homes now in default.

Lehman is also down considerably and all of the financial stocks are teetering on disaster. The Fed has fired all of its bullets and short of dropping money from helicopters and bailing firms out (with your money), there's not much they can do. The recent decline in financial stocks will make it more expensive for these firms to attract new capital which is the life blood of a financial company. Interest rates are headed higher around the globe and that will also increase the cost of capital.

On a bullish note initial jobless claims rose less than expected only dropping by 58,000 last week--however don't read too much into that number until we see improvement over a period of weeks. Employment is the key to this economy and jobs are the only thing that can save buoy the country from a much deeper recession.

Retail sales figures came in better than expected and the rebate checks are still filtering in (wait a second--I guess the government DID sort of drop money from helicopters). Over 62% of the retailers reported figures that topped analysts estimates and 38% fell short. Once that stimulus is gone, retailers will be headed for lean times.

Panic is starting to set in and it's doubtful a white knight will ride in to save the day--no matter who wins the election. Interest rate cuts, discount window cuts, collateralized loans to financial institutions and rebate checks have all been used--the only thing left is out and outright bailouts--and they're not really a white knight since we all end up paying for poor investment decisions made by others.

The market is in a downtrend and in spite of today's rally it will likely continue for quite awhile. Along the way, we can expect a number of bear market rallies. They can be quite strong---the bounce that started in March is a good example. We will not see that move until the market has plunged intraday and it reverses. Then, we need to see follow-through buying for at least two days. Once that happens, traders will lean on the capitulation low that was formed and they will gradually support the market--for awhile.

GE releases earnings tomorrow and that could spark a rally for multi-national industrial stocks. Earnings season will kick off with the financials next week and it is possible that the banks will hold up since they are already priced for disaster. If that rosy scenario unfolds, we could see our short term rally.

Next week's economic news includes the PPI, retail sales, CPI, industrial production, FOMC minutes, initial claims and Philly Fed. The inflation numbers will weigh on the market if the core rises but keep in mind food and energy is already expected to rise. The FOMC minutes will weigh on the market if there is a bias towards tightening and fighting inflation.

Longer term support is at SPY 115. That would represent a 25% pullback from the high. The market formed a high at SPY 115 early in 2004 and it took the entire year to get through that level. Late in 2005, the market came back to test that level before it made its next leg up. That makes this a significant horizontal support level.

The smart bet right now is to remain bearish and continue looking for a better entry point to get short--and if today's rally continues we may get there soon. Any bounce will need to be convincing (many days) to shake out the shorts. As it stands, the brief one-day rallies won't shake any one out and the decline will continue until we see a capitulation spike lower

Market Commentary is provided by Cashflowheaven.com.