October 31st, 2008

See me in the latest issue of "Technical Analyst", Trading Volatility with the VIX

Not so spooky stocks.

After trading lower in overnight trade, the major stock index futures were able to shrug off questionable economic data and forge new highs.  While I questioned the ability of stocks to maintain gains earlier in the week, the market has traded consistently above what I have deemed to be "make or break" levels.

Accordingly, the upward momentum seems to be sustainable in the near term.  The S&P 500 futures seem to be looking higher toward 1050, while the Dow may not run into significant resistance until reaching 9,917.  If you are a NASDAQ trader, look for the December futures to travel to 1441. 

As I was writing this newsletter, the markets were on pace for the best weekly gain ever. Keep in mind that the month of October was the worst month ever recorded in the markets.  October 2008 also saw the highest VIX reading (based on the "new" calculation) and the subsequent.  Records were meant to be broken, but things seem to have gotten out of hand. 

If you recall, several weeks ago we mentioned that October has been dubbed the "bear killer" but the Stock Trader's Almanac as well as other historians.  October has buried 6 of the last 10 bear markets over the previous 60 years and this October seems to be living up to expectations.  While we won't truly know whether or not the absolute bottom has been made for several months, it seems that the market has at minimum fended off the worst case scenario; complete devastation of our financial markets. 

November, on the other hand, is notorious for being an overall positive month for equities.  It has been the best month for the S&P 500 since 1950 and the third best for the Dow, and the second best for the NASDAQ  in the same time frame.  with that said, election years tend to produce even more consistent gains in the month of November for the Dow and S&P.   Something that you may also find interesting;  according to the Stock Traders' Almanac, the day before and after Thanksgiving combined have only produced 10 losses in the previous 55 years. 

Whether you are a Republican, Democrat or Independent it may be helpful to know that the last 8 Republican victories averaged gains of approximately 3% in the S&P 500 while the last 7 Democratic wins produced gains of just 0.4%.   

Boo!

Please note: A mini S&P chart is used because it is better for charting purposes, but trade recommendations are based the full sized S&P unless otherwise noted.

S&P 500 Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade –

October 22 - Buy lottery tickets on the dip!  I like the November 1050 calls for $6 in premium. 

·         Clients were advised to liquidate these on October 29th near $15.50 for a profit of $475 (in the mini, $2,375 if you trade the full sized). 

October 29 - Clients were advised to purchase the November mini S&P 700 puts, fills were at or near $6 or $300.

Please note: A mini-sized Dow chart is used because it is better for charting purposes, but trade recommendations are based the full sized Dow unless otherwise noted.

Dow Jones Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade –

Flat

Please note: A mini-NASDAQ chart is used because it is better for charting purposes, trade recommendations will denote whether a mini or full sized contract should be used.

NASDAQ Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Swing Trade -

Flat

There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.