January 20th, 2009

Obama in, buyers out. 

Today's trade lived up to historical standards.  Sources cited a 72% occurrence of inauguration day losses.  Equities suffered in what I consider to be "buy the rumor, sell the fact" trade.  Now that the new administration is in, reality may have set in as to the severity of the problems at hand and the dismal odds of a V-recovery regardless of who resides in the White House. 

Wall Streeter's are beginning to suspect heavy regulations from Washington.  In Obama's inauguration speech today he mentioned, "Without a watchful eye, the market can spin out of control."

The British government has mimicked recent actions of our own Federal Reserve by injecting what seems to be a never-ending amount of money into the Royal Bank of Scotland.  The Royal Bank announced that its losses for 2008 could be in excess of $41.3 billion. 

At the close of trade on Friday, we were expecting a continuation of the short covering rally to 888 in the S&P, 8,550 in the Dow and 1223 (with the possibility of 1274) in the NASDAQ.  However, we mentioned that it would be tough to make further gains.  While we over estimated the short covering rally potential (most likely due to swift overseas selling), our fears of a subsequent market sell-off became a reality in today's session. 

The November lows are now within breathing distance.  Despite what look to be technically oversold conditions, I can't help but feel that there is some room for the market to move lower.  You may recall us mentioning the potential for the S&P to see 670 at some point in the first quarter, it appears as though it could happen sooner rather than later.  The Dow, on the other hand, may be in store for a slide to 6,000 and the NASDAQ to sub-1000 territory. 

Despite my bearish outlook for stocks, I wouldn't recommend that the bears chase it lower.  The deeper the dip, the more powerful the recoil will be.  If you aren't already exposed to the downside, you will likely be better off patiently waiting for better levels to be a bear.  Also, if you are looking to buy puts...you may have missed the party.  Put premium has exploded with implied volatility making option buying a difficult venture.

If you can't stand being a bull without a position, you may want to look at out-of-the-money calls in the February options.  I like anything less than $450...about 910 to 930 strike prices. 

If you are a bull looking to sell put premium as a means of taking advantage of the explosion in volatility, or are interested in executing a bullish option spread, I also recommend waiting.  There could be better opportunities in the coming weeks and in my opinion it is better to miss the trade all together than it is to be caught in a free-fall with unlimited risk. 

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 –

January 15 - If you took our advice in yesterday' report to sell the February e-mini 630 puts for $8, we recommend being quick to take a profit.  It may be possible to buy it back for $2 or $3 tomorrow.

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

Position Trade –

Flat

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.

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