October 28th, 2008

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

Stocks rebound, but momentum lacking.

Stock index futures gapped much higher on the open of day session trading and managed to maintain an overall bid throughout the day.  Higher markets overseas paved the way for bargain hunting and likely short covering. 

Speaking of short covering, what is being referred to as the "mother of all short squeezes" occurred in Volkswagen shares.  Shares more than doubled on the day to peak near $230 but began their journey at a price of under $60 per share.  The sharp reversal came on the heels of an announcement by Porsche that they will be increasing ownership in the firm. 

Volkswagen is the most shorted stock in the German stock index the DAX.  Nearly 13% of the firm's shares are traded on loan, mostly with short selling intent.  I am confident that those short this stock wish that they had never bothered.  In yesterday's report, I mentioned that in order for this market to turn around we will need a massive short squeeze in order to shake up the bears.  The Volkswagen squeeze is on a much smaller scale than it will take to forge a sustainable bottom in equities but it is a good sign.   

Consumer confidence plunged to a 41 year low to 38; economists were looking for a number closer to 50.  This leaves many to wonder whether we will ever see light at  the end of the tunnel.  Keep in mind that consumer spending accounts for nearly two-thirds of economic growth and it was the consumer that kept the economy afloat in recent downturns.  This is especially disconcerting given the quickly approaching holiday shopping season. 

According to Jack Ablin, chief investment officer at Harris Private Bank in Chicago, "The market already reflects a very, very poor outlook.  That said, these numbers are coming in a way lower than expected."  He added, "Consumer confidence is a pretty good predictor of retail sales." 

If consumers act as sick as they feel, we have a long road ahead of us.  Fortunately, the markets tend to turn around far before the economy ever does.  Regardless, as much as I would like to, I am not "buying" today's market bounce.  It seems as though we have at least one more trip to the lows and possibly moderately beyond. 

I have slightly adjusted my targets, I see the December S&P futures trading near 789 in the near future and the Dow near 7,580 and NASDAQ futures seems to be looking towards 1105.

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 - Sell the November 500 put for $4 or better.  It will take substantial weakness for this to get filled.

·         Liquidate this option at the market, you should be able to take a profit of about $2 ($500).  Clients were advised to cancel the order to enter this trade before it was filled. 

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

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

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.