Stock markets staged a massive one-day rally on Wall Street on Tuesday to start the second quarter on a bullish note. The DOW and NASDAQ both surged over three percent, as there was optimism that the credit problems in the United States would be improving and the economy was doing better than expected. But, I’m not as convinced that the credit crisis and economy are on the mend. The reality is that the soft housing sector will remain a negative influence on consumer spending and economic growth.
Despite some upward moves in financial stocks, I would be hesitant to dive in to the financial sector at this time, unless you want to speculate. If you do, you should also be aware of the downside risk that remains, as stocks could quickly turn down.
It was no fluke that, on Tuesday, Switzerland-based UBS AG (NYSE/UBS) said that it could see a dismal first-quarter net loss of $12.0 billion and would need to retain another $15.0 billion in new capital due to the effects of the subprime mortgage problems in the U.S.
The key in this market is to watch to see if markets can put together a string of positive days on strong volume. If this should happen, watch to see if profit-taking emerges. My feeling is that investors remain nervous and could continue to sell on rallies.
Our view is to try to wait out the current turmoil and watch for things to improve. Begin to highlight some stocks you may be interested in buying if there is a dip in the market.
Option traders may want to buy call options to play a potential rally. In this case, nearer-term call options would make the most sense due to their cheaper premiums, as the time-value component of the option is absent. But be aware that near-term options have major risk and often expire worthless by the buyer of the call.