Market turning?

It is still too early to declare a market bottom, but maybe it is starting to turn.  The VIX is still up about 28 and needs to get down under 20 for several days before the bear is dead.  But that process may take many months with a confirming low of 1300 or so on the S&P (matching the low last week.  In the meantime, it is possible to play the rally which could go to 1425, the point where the market broke down previously (on Jan 10).  The next point of resistance on the up side would be at 1490 which was reached mid December.  So, there is some room to run, maybe 10% or so.

 

There is some danger the next couple days if the Fed does not come out with the liquidity that is expected.  The market wants the 0.50 basis point cut and more programs to support the financial industry, such as the increase on Fannie Mae / Freddie Mac loan limits to $800K from $470K.  But if that happens as expected, it will provide adequate stimulation to get the economy restarted.  That said:

 

There have been some big selloffs in good stock names on decent earnings reports that met or beat analyst expectations.  But they sold off on bearish sentiment and less than stellar guidance.  MCD, EMC and YRCW are among the candidates for a big bounce from oversold.  They can be played with options.  I sold short puts on EMC today.  Another I sold is RACK (Feb $10 for 1.40) as it is down 40% from a recent high of 15 and over 50 in 2005.  It has been pulled down by negative sentiment on the tech market, even though it continues to beat earnings and revenue expectations and has industry leading products.

 

SMH is still on the watch list since the semis have very bad sentiment right now.  But, once the market bottom is in, tech will be the first to recover as usual and will do so in multiples of the overall market.  Semi demand will increase with tech equipment demand.  Book to bill as reported on www.semi.org is already quite low at around 0.80, so there is room to run to the upside in semis. 

 

I am also buying LEAP calls on the financial names as they may go up 50% from here over the next 18 months.  I own BAC and C Jan 2010 calls and am looking at Wachovia and USB (though the latter did not go down much because of the Buffett aura).

 

There should be an opportunity for a quick short of the market around the end of February once the Q1 earnings reports and the Fed infusions are over.  If the S&P gets back to 1490, puts could be bought against SPY or a sector like XLF or XLY for the inevitable pullback to 1300.  That pullback might correspond to the typical summer doldrums and be fueld by more housing and financial industry problems.