February 20th, 2009

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Stock index futures struggle to hold support.         

U.S. senator and Senate Banking Committee Chairman Christopher Dodd kicked the market while it was down by suggesting that nationalization of the banks is a possibility.  Whether this was a glimpse of what is to come or a slip of the tongue is yet to be seen.  However, based on my research and conversations regarding the subject it seems as though Mr. Dodd was being premature, and irresponsible.  In fact, moments after a very negative equity market reaction the White House announced that they strongly believe that a private banking system is the way to go.  Stock index futures recovered somewhat on the clarification but the damage was done. 

According to Standard & Poor's, at the end of October 2007 the ten largest financial services firms in the S&P had a combined market cap of over $1.2 trillion.  At the time, Bank of America had a market value of $214.2 billion based on share price.  Some bank shares are trading at lows not seen in over 20 years.  As of Thursday, the 10 largest financial-services in the S&P had a combined market capitalization of $298.6 billion...not far off from the late 2007 value of Bank of America alone. 

One thing is for sure, this was an exhausting week.  I remain bullish at current levels but respect the market's ability to fully retest last year's S&P lows near 740.  Those willing to take considerable amounts of risk may find attractive put premiums for short option plays.  However, being nimble in this market is critical and taking quick profits when available is necessary.  Overstaying a welcome could lead to turmoil.  That said, the indices are oversold and due for a corrective rally.  I see potential for the Dow to reach levels as high as 7,900 and the S&P could get to 825 on a short covering rebound.  NASDAQ futures could see 1208 again by early next week if shorts begin to cover. 

It was brought to my attention yesterday that there are may be attempts to tax traders per transaction.  I haven't gotten the chance to fully research the matter enough to determine whether the talks are serious.  However, after seeing the manner in which everything plus the kitchen sink was included in the stimulus bill I don't take anything for granted.  If you would like to speak out against a transaction tax charged to futures, options and stock traders visit http://www.rallycongress.com/no2tradertax/1536/tel-congres-to-block-trader-tax/  and email your opinion to our elected officials.  It seems as though Washington is of the belief that taxing speculation will "get back" at the Wall Street crew that caused the problems that we face, but in our opinion doing so will be harmful to Main Street. 

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.  However, market analysis and commentary does.

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 –

February 18 - Short March S&P 660 puts at $8, looking for a quick rally to cover. 

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.