Stock Market Rally Could Stall, Consider Puts
The stock market has been rallying since late April, but I’m not sure the worst is over yet for the economy. I recommend buying S&P 500 put options to set up for a possible pullback into June.
Reading the headlines, it seems clear to me financial risks are resurfacing. Consumers have been shifting more debt to their credit cards amid the housing crisis and as food and energy prices are rising. In April, the American Bankers Association predicted card delinquencies will continue to rise in the first half of 2008.
In an SEC filing this month, Capital One reported net charge-offs in its U.S. card segment rose to 6.08 percent in April, up from March and February.
In the S&P 500, banking stocks have been the worst performers this year. The S&P 500 Financials Index has dropped 33 percent in the past year. And in the insurance area, American International Group Inc., the world’s largest insurer, just announced the need to raise $20 billion to protect against additional write-downs. The financial sector overall is still not out of the woods yet.
I don’t see the fundamentals supporting a healthy rally in the equity markets. I recommend buying June S&P E-mini S&P 500 1415 puts on a drop to 1380 -1375 in the S&P in the next few weeks. These options expire June 20 and would cost about $1,500, excluding commissions, as of this writing.
We do have the minutes of the April 29-30 Federal Reserve policy meeting on tap this afternoon, but I don’t see it as a big market-mover. The Fed is likely to say their past interest rate cuts will need to work their way fully through the economy before we see significant improvement.
In a speech in New Orleans on May 20, 2008, Federal Reserve Vice Chairman Donald Kohn said economic conditions remain “quite difficult” and cautioned that a likely return to stronger economic growth next year “could be relatively moderate.”
Though the market’s performance has improved from the first quarter, I think investors have reason to remain cautious.
Of course there are other strategies you can consider, give me a call and I’d be happy to tailor a strategy to your specific goals and risk-tolerance. Ask about our special 50 percent off commission offer for new clients too.
Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.
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