Market Dumps on Inflation and Financials

The market will open very quietly this morning. There are no catalysts until the Oil Inventory Report, which comes out an hour after the open. If the market stays quiet most of the day, look for the Fed's Beige Book to garner some interest. The report is an anecdotal view of current economic conditions. Traders may be sitting on price action until they get another catalyst, but I will keep watching for the 2-Day range break throughout the day. Until the market signals a direction, there is no point in getting too jumpy with your trading.

7:55 am MT: The Dow dropped right to the 3-Day low. I'm watching closely for a break. I decided to stop out of RIMM. The total loss was 7% on a 1/3 sized position. I don't want to be long (calls) anything until we get a confirmed bounce on the market. I may not want to be short (puts) anything either, except maybe some DIA puts initially. But I still want to see if there is going to be some Fast Money Manipulation around the 12,190 area.

8:10 am MT: I picked up some puts on DIA and SPY. I will add to them later, perhaps if the market continues to sell after the Fed's Beige Book. If the market takes a quick, sharp drop this morning, then I may just lock profits as we go along.

8:15 am MT: The Dow has treated the breakdown area correctly, it's unlikely that Fast Money can manipulate this. The market will probably stay down today, especially if we don't get a substantial catalyst from either economic report.

I also picked up puts on QQQQ. I am willing to double the DIA, SPY, and Q's positions on an intra-day upswing, as long as it doesn't run too far.

11:30 am MT: The market continues to consolidate at its lows ahead of the Beige Book. The report comes out in 30 minutes, so I'm not expecting anything dramatic until then. If the numbers come in positive and the market starts spiking, I'll sell all 3 puts immediately. If the numbers are so so, or poor, and the market drops, I'll sell half into a drop and hold the rest for a little while.

12:10 pm MT: At first glance the Beige Book doesn't look like it's revealing anything breathtaking one way or the other. The Fed sees general softness in the majority of its districts, but some stability in the others. It doesn't look strong enough to put a big tailwind under the market. I am going to stay with my puts for now.

1:50 pm MT: I started scaling out of a few of the put contracts on the DIA, SPY, and QQQQ trades. The DIA puts are a 13% gain so far, the SPY puts are a 10% gain so far, and the Q's puts are a 13% gain so far. I'm holding about half the positions and watching for the swing to complete tomorrow morning.

3:30 pm MT: Market Wrap: The market broke down through the 3-Day lows on the Dow and gave a nice put entry just as I outlined in the charts yesterday. The catalyst was a combination of rising oil prices, inflation concerns, and analyst Meredith Whitney over at Oppenheimer banging the drum for more Financial sector write-downs. She has been pretty accurate so far with her forecasting, and it makes me believe the Financials continue to be a gigantic mess. The unbelievable over-speculation on loans, especially subprime loans, is just killing this sector. Talk about paying the price for greed.....

An interesting divergence was the rise in oil prices and the muted response in Energy stocks. There really aren't any significant catalysts in any key sectors right now. Even the key economic reports tomorrow and Friday don't look like they will help. Retail Sales is tomorrow and the CPI (Consumer Price Index - a key measure of inflation) is Friday, and neither one is probably going to be good enough to give the market a significant tailwind. The market indexes look like they could drop again tomorrow. Probably the only thing that will bounce the market in the next two days is either a less-than-catastrophic Retail Sales/CPI, or a technical support trigger. My guess is that it will probably be a technical trigger because the economic reports have not been surprising anyone lately.

So for now it's business as usual with the puts. If we get a short term bullish bounce then I'll be looking at Coal stocks, Chemical stocks, some Energy stocks, and some Agriculture stocks. I might look at Tech, but that's not certain yet. I will also continue to play ETF's more and more. And I will expand out the number of sector and index ETF's I play if the "spaghetti market" doesn't untwist itself a little more.