I have been warning readers in the LeapsTrader commentary that stocks could be a lot lower as we near the end of summer. I will confess I was not expecting the sell-off to happen so soon or so quickly. Nearly everything was sold indiscriminately, which is normally a sign of a bottom or at least a short-term capitulation.
Stocks are now very oversold and due for a big bounce. Unfortunately market participants face a lot of uncertainty. How does the U.S. credit downgrade compare to the ECB news on Friday that the ECB could start buying Italian and Spanish bonds? (see tonight's market commentary)
Furthermore, there is a lot of uncertainty regarding the U.S. and global economy in the second half of 2011. For months we've been told by the Federal Reserve that the back half of 2011 would get better but that view looks very cloudy thanks to a parade of slowing economic reports. Recent corporate earnings results have been strong but guidance has been lackluster and cautious.
The sell-off is extremely overdone for a number of stocks. On the positive side this correction should end up producing a great entry point for new positions. The challenge is determining when to open positions. Our entry point might be a week from now or it could be in October. It's hard to say when we have not seen the market reaction to the U.S. credit downgrade or heard from the Federal Reserve who meets on Tuesday.
The first part of this week could be extremely volatile again. Would you rather try and initiate new long-term LEAPS positions with the S&P 500 at 1200 or at 1100? Obviously 1100 would be more attractive so we'll wait and see where the market closes next Friday.
No new trades tonight. I did list a number of stocks on my radar screen in the watch list tonight.