November 19th, 2008

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

Lack of buyers sends indices to recent lows.

There weren't any surprises in Wednesday's session.  Instead it was more of the same...doom and gloom.  What we were all hoping for a year ago (lower inflation) has now become the perceived enemy.   

An unbelievable shift from fear of inflation to fear of deflation has occurred as data as recent as this morning suggests that price stability is uncertain.  Unlike concerns experienced in 2007, it seems as though prices of goods and services are simply dropping too fast.  The CPI index dropped 1.0% but this wasn't a surprise.  Analysts were calling for a decline of about .8%. 

Minutes taken during the October 29th FOMC meeting were released this afternoon.  The Fed hinted at further cuts after communicating lower projections for economic activity for the remainder of 2008 and throughout 2009.  The Fed funds target rate is currently resting at 1%, a level only seen one other time in the last half of a century. 

According to the Fed, the economy "would remain very weak next year" and "the subsequent pace of recovery would be quite slow." Consequently, the Fed is expecting the unemployment rate to increase to levels between 6.3% and 6.5% this year and as high as 7.6% in 2009. 

Following today's deflationary CPI reading, it was somewhat positive to hear that the Fed expects that "more aggressive easing" in monetary policy could reduce the risk of a "deflationary outcome". 

The U.S. economy hasn't had a serious bout with deflation since the 1930's.  The biggest problem with deflation is the limited resources in fighting it.  For example, the Fed Funds rate can only go so low. 

In yesterday's report we were looking for new lows in the S&P, and today we got them.  I still feel as though a bottom will be found shortly but am concerned that we may see 770 before turning around.  At this pace, we could see 770 by tomorrow as I have been told that there are several sell stops lingering below 800 and the market's tendency to inflict misery on traders tells me that we will run them.  If you want to be in the market, with little risk but potential to catch the rally if it occurs buy a few lottery tickets such as the December calls with strike prices of 1000 or higher.

Our downside objective for the Dow in yesterday's report was 7,900 and we aren't far away.  However, 7,650 offers the next level of support and may also be seen in the coming days before the market finds a bottom. 

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 12 - Our clients were advised to buy the December e- mini S&P 500 1030 calls for $6 in premium or $300. 

November 19 - If you are willing to take on the risk, the premium is looking attractive in puts.  I like selling the December e-mini 575 put for $10 or better.  This is equivalent to $500 and has a breakeven point of 570.  Risk is unlimited below 570.

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 –

November 18 - There is a lot of premium in the puts, it is scary but selling seems to be a good call.  I like selling the December mini- Dow 6000 puts for 100 or better.  It will take additional weakness to get this filled. 

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.