November 26th, 2008

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Thin volume seems to favor a stock market rally, more up?

The equity market celebrated Thanksgiving a day early and if history has anything to do with it the party should extend into Friday's session.  The futures markets will trade electronically overnight as usual, but trade will be halted tomorrow morning at 10:30 central time in observance of the holiday.  Trading volume has been extremely light and that may be contributing to the gains. 

What has given me a bit of hope in regards to this rally is the fact that everyone is having doubts.  Regardless of the business news television station that you frequent or the websites you faithfully read, you are likely being exposed to far more opinions calling for another failed rally than the opposite.  Sometimes when "everyone" thinks that a market will do one thing, that is precisely when it doesn't.  There is a lot less talk about this being the bottom than we have witnessed in previous corrections, and that could mean that the bears are in and they are too comfortable.  If the S&P can hold above 888 in the coming days, I think that we will see a much larger move to 1000.  If I am proven wrong, another retest of the lows should prove to be a great place to be a put option seller and a call buyer. 

I think that the holiday is a great excuse for traders and investors to take a step back from the markets and look at things logically.  As a futures and options trader, it is easy to get caught up in what the market may do today or tomorrow and we often forget to look at the big picture. 

There are a lot of comparisons to the current economy to that of the Great Depression.  I realize that these comparisons are forward looking.  The possibility of a second depression exists, but the market looks to have assumed that it is in fact going to happen.  I personally think that there is a lot of overreaction in the marketplace.  The Great Depression saw a negative GDP of 13%, an unemployment rate of nearly 24%, a negative inflation rate of nearly 10% and a 9% drop in consumer spending. 

On a percentage basis, the current bear market has surpassed the 1987 downturn, the 2000 tech bubble collapse and even the Arab oil embargo induced bear market of the 1970's.  On fact, with the exception of the 1970's, this downturn has the others beat by double digits to leave the equity markets grossly overvalued.  Cheap doesn't mean that things can't get cheaper, but it does mean that large dips shouldn't be taken for granted.  For example, the risk of buying and holding one e-mini futures contract is less than $45,000 even after today's rally.  In other words, if you go long the S&P here and the world comes to an end you will only lose $45,000.  In essence, these are the same odds that you would have buying an S&P equity index as there is no leverage.  However, if you have a $45,000 account and you purchase two e-mini contracts you would have enough capital to ride it all the way down to under 450 in the S&P.  On the contrary, if the market recovers to 1500 your account would be worth a little over $100,000.  If you have the risk capital, it may be worth the bet.  With that said, you would have to promise yourself that you won't drive yourself crazy watching it.

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 –

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.

·         This would have been filled on Friday, we recommended buying it back for $3 or less on Monday (you should still be able to get this price or better tomorrow).  Assuming a fill at $10 to get in and $3 to get out, the profit would be $350 per contract 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 –

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. 

·         Place an order to buy this option back for 30 or better (don 't get greedy, if you can get out for a little more you should take it). 

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.