Bad News Financials Crunch the Market

The good news was that MER appears to be getting a premium for its sale to Bank of America. The bad news is that LEH is filing for bankruptcy and the stock is trading down to .36 cents, and AIG is trying to raise cash to survive. We already knew the Financial sector was in bad shape, but the AIG news casts a new level of doubt on the survivability of many Financial companies. Today could end up being very ugly, at least in the morning.

There is some good news out there.....Oil is down to the mid $95's, which is the bottom end of my support zone. It will be interesting to see if oil holds the $90 area or not. Gold is up as a flight to safety this morning.

I don't want to be long (in calls) anything right now. If I do anything today, it will probably be to play puts on the DIA, SPY, and perhaps the Q's and IWM. I will watch for an opportunity early in the day, but remember that oil dropping in price eventually will give the market a boost. However, the news is so ugly in Financials right now that we could see alot of fear selling, and Energy and Commodity stock selling will probably only add to the bearishness this morning. Strap on your seatbelt, I told you on the last post to expect some early week volatility, and here we go.....

One other note, don't feel compelled to trade in this kind of volatility unless you get some nice buy signals intra-day. Otherwise, you may want to stand back.....

7:31 am MT: I cleared out the STI calls for a .64 cent loss at the open. That was my only directional trade left over from last week. I want to be flat while I watch all this play out today.

8:30 am MT: The market is bouncing off the big gap down. This is the first test to see if the day will roll over and dump back down or it will stabilize.

9:30 am MT: The market did crack back down and test near the lows of the first hour. I doubt that the market will be able to mount a serious comeback today with the weight of so many sectors selling off on fading fundamentals. Even Energy and Commodities are selling hard, as I anticipated.

12:00 pm MT: I nibble on puts for ACI, NOV, and MUR. In addition, I nibbled on DIA and SPY puts, but I kept those positions very small because of the crunching back and forth price action today.

1:55 pm MT: I locked and walked on all the puts from today: ACI was a .40 cent profit or 12% gain. NOV was a 1.00 profit or 17.5% gain. MUR was a .70 cent profit or 18.5% gain. SPY was a .79 cent profit or 18% gain. And DIA is a .70 cent profit or 17% gain so far. I kept a little of the DIA puts and everything else is cleared out.

3:00 pm MT: Market Wrap: Well that was that.....The Dow finished at the lows of the day and down 504, or down 4.42%. The SPX was even worse at minus 4.65%, and the Naz fared a little better at minus 3.60% (I guess it’s all relative). It was a great day for puts and not much else.....

Oil dropped down to the low $94’s, which gave Transports, especially Airlines a boost. The drop in oil prices is a welcome relief to the slowing economy and the Financial sector mess. I could spend a lot of time squawking about all the ins and outs of how the financial institutions got into the trouble they’re in, but you’ve already heard it from me over and over.....I could also spend a lot of time talking about the Fed’s bungling going back to the summer of 2007, but why bother, you’ve heard all that from me as well. Of course we can’t leave out the government’s role in dictating business rules to loaning institutions and the utter incompetence of politicians interfering with the free markets, but that’s all been hashed out a bunch of times too.....

Here’s what I will say about the market today: it was a big sell-off, it broke support, it’s intermediate term bearish, and it’s getting pretty oversold short term (that’s what happens when we get a 500 point down day on the Dow). Now, tomorrow is all about the Fed. It was going to be a non-event, and if the Fed is wise, and has learned its lesson, it will keep tomorrow a non-event. But Fed Funds Futures took a huge jump today as traders went wild with speculation on what the Fed should do. Now, as of today, the FFF are pricing in an 80% chance of a rate cut tomorrow! Normally I would say that it’s pretty much a done deal, we get the rate cut. But these are historic times and not normal times. I think the Fed will make a big mistake if it cuts rates tomorrow, which would be like slapping a dirty band-aid on an gaping, bleeding hole. I think the bankruptcies and consolidations due to crazy, selfish speculation are already a done deal. I don’t think a 25bp rate cut does any good, and in fact it could do more harm, especially if it puts a speculative bid under oil and commodities. However, my opinion means nuts in the world of the trading, so here’s the rest of the news. Traders have gone all the way (last June) from pricing in 100bp of rate HIKES by next February, to (today) pricing in 50bp of rate CUTS by next February! Such is the turmoil and confusion of the financial markets. It’s never been more important to focus on the charts over the news, and I still haven’t changed my year-long trading strategy – take it day by day and don’t hold directional positions for more than 1-3 days, and don’t hold many full positions overnight.

One Final Note: I answered the past three posts questions and comments, so I'm up to date. You may find the Friday answer to Francis about "psychology" books instructional.