If the market pops a little higher, I’d like to buy puts in these 3 stocks

  • September 2, 2005
  • Joe Corona

Unexpected events force
the market to reveal its true nature. The terrorist bombings in
London on July 7 resulted in an immediate panic in the markets that were open at
the time. The US markets also opened and traded lower that morning, but by the
end of the day, to the amazement of most traders, the bad news had been chewed
up, spit out, and the market went on a romp that carried into early August.
Clearly there was pent-up buying pressure under the market.

Once again, a terrible tragedy has forced the market to reveal its hand. The
news surrounding the Hurricane Katrina disaster seems to worsen by the day, yet the
market rallies? Why? Because the news is so bad it is good. The impact of
Katrina and the damage it will do to the economy might bring a premature end to
the Fed’s tightening program. Greenspan has always been quick to respond to
macro events in the past, and the speculation is that he will do so again by
backing off on the tightening. Once again the market has cherry-picked a tiny
sliver of good news out of the bad and run with it. It also didn’t hurt that
this occurred near month-end, we all know what that means!

So far the patterns seem similar, let’s see if it follows through:

I am watching this rally closely to see if it can shake some of the shorts out
of a sector I am interested in shorting, the homebuilders. This trade got
crowded too fast for my liking, and I am hoping the
“Katrina-will-force-the-Fed-to-stop-tightening” theme will give them a little
pop. So far, so good:


The Housing Index
(
HGX |
Quote |
Chart |
News |
PowerRating) has rallied smartly into resistance and I am
looking closely at a couple of the component stocks for possible longer-term
short positions. If they can shake the shorts out a bit further and back
volatility down, I would like to own some long-dated puts in the following
stocks:




When Greenspan said that the Fed would be monitoring asset prices when
formulating monetary policy, that was code for “we are going to pop the housing
bubble.” Be patient, but keep an eye on this sector.

Joe Corona

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