November 7th, 2008

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

Stocks take employment report and GM earnings in stride.

After one of the largest two day drops in history, the domestic indices traded in positive territory despite another onslaught of crippling economic news.  The term "dead-cat bounce" is being used by many to describe Friday's action but only time will tell. 

The unemployment rate soared to a 14 year high of 6.5% in the month of October.  Knowing this, it isn't surprising to see that the economy lost another 240,000 jobs last month.  The numbers were much bleaker than economists were looking for but better than the market had priced in.  Simply put, investors had accounted for the worst case scenario in the Wednesday and Thursday plunge making reality seem like a positive. 

To put these numbers into perspective; if you recall, the recession following the tech bubble and September 11th, peaked at 6.3%.  Similarly, the October decline in jobs marked the 10th consecutive month of reductions.  This brings us to a total of 1.2 million job losses on the year with a little over half of this occurring in the most recent three months. 

As if news of massive job losses wasn't enough to ruin our weekend; GM reported a $2.5 billion third quarter loss and claims that it may run out of cash in 2009.  According to the automaker, the firm is burned through cash at a pace of $6.9 billion during the 3rd quarter.  According to company insiders, "Even if GM implements the planned operating actions that are substantially within its control, GM's estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business."

I am not convinced that today's bounce has thwarted the selling efforts in equities.  While I respect the market's ability to move to 940 in the S&P, 8,990 in the Dow and 1300 in the NASDAQ in the near term; I believe that it is likely that such levels will be met with selling pressure.  I stand by my assumption that we are still on our way lower.  My downside targets have been moderately revised to 1166 in the NASDAQ, 850 in the S&P and 8,140 in the Dow. 

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

·         November 7 - These are underwater, but not out of the question.  Place an order to sell them at or near $15.

November 4 - Buy the November e-mini S&P 850 puts for $6 or less

·          November 6 - If you were able to get in on this trade, place an order to sell it at $27 or better (don't get greedy, if you can get out for a little less take it). 

·         November 7 - You should be out of this trade.  Assuming that you were able to get in for $6 and out for $25 you would have been profitable by $950 before commissions and fees.

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.