May 30, 2008 Options Success Market Commentary

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After challenging major resistance at SPY 144 two weeks ago, the market pulled back 4.5% heading into the holiday weekend looking like it was hitting the skids for real---but when trading resumed this week, the market started climbing. Minor horizontal support held at SPY 138.

Part of the reason is the economic news this week has been generally positive. Durable goods orders came in better than expected and, excluding transportation, they were up 2.4%. The GDP was revised upward from .6% to .9% and the price deflator (which does not include food or energy) was revised downward by .1%. Initial jobless claims came in at 372k, which was in line with expectations.

Next week, normal trading should resume and there will be many new pieces of economic data for the market to digest--the ISM manufacturing, ADP employment index, ISM services, crude inventories, initial jobless claims and the Unemployment Report. Four weeks ago, ISM manufacturing came in at 49 and the ISM services number was over 52. A number above 50 indicates expansion. The initial jobless claims numbers have been stable the last three weeks and chances are good we'll see a positive reaction to the Unemployment Report. Last month, the market rallied 30 S&P points on the number.

Retail earnings were mixed, but generally positive this week. As the tax rebate checks are received, this sector could get a temporary booster shot as consumers get rid of them just as fast as they can. There are not any major earnings announcements slated for next week and the market will take its direction from the economic data and oil prices.

This week, oil inventories dropped much greater than expected so you would expect oil to rally on the news, however, it plummeted more than $4. If oil has formed a top, the market will have a catalyst to keep zooming higher. There are signs that demand could be slowing in the coming months. MasterCard showed that gasoline sales were down 5.5% over Memorial Weekend and demand has fallen for 5 consecutive weeks from last year's levels. Many countries that subsidize oil have abandoned this practice because of the high cost. This means that consumers will be forced to pay higher prices and they are likely to cut back. Many analysts are blaming speculators for the high price of oil and if that is the case, oil will fall just as quickly as it spiked. There is a good chance that oil has reached a temporary resistance level and that a $15 pullback is possible but the long-term fundamentals tell us any decline is a buying opportunity.

The market is clearly searching for direction and it's a good sign that tech stocks have been leading the way higher. Financial stocks are reaching very compressed levels as they drift towards the March lows. We could be reaching a bottom on financials and if so they will not weigh the market down as they have in the last six months.

The short-term up trend during the last two months has been strong. Today, end-of-month buying is moving the market higher. There are enough "positives" for the market to challenge SPY 144 next week, but it will take an incredible round of economic news and a big decline in unemployment to push it through that level. It will be interesting to see how the market reacts as it gets close to that resistance level--if it gets slapped down, that resistance will likely hold all summer. If the market creeps up to it and holds, we have a chance of breaking through soon.

The Fed will not meet for another month and interest rate chatter has been relatively light. As inflation continues to rise, they will be forced to to raise rates and that will keep a lid on this rally. A round of mortgage resets will hit in June/July and that will weigh on the market in August/September.

This is a time to trade both sides of the market with opportunities on the downside on restaurants stocks and the under performers in the retail sector-and bullish opportunities in energy after it finds support. There are some tremendous profits to be made on both sides of the market and you'll be doing it a whole lot faster and easier by subscribing to the Daily Report --we'll see you there!

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