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Market Wrap

Stocks Plunge as Panic Builds!

Market Wrap

Stocks plunged lower Wednesday as traders and investors sold aggressively as anxieties increased about the global credit crunch.

While the CBOE Market Volatility Index VIX.X rose further above the 30.00 level, which some may associate with "fear," with the CBOE reporting 9.73 million contracts changing hands (busiest trading in its 35-year history, the real sign of panic and fear is revealed in the 13-week Treasury Yield ($IRX.X) which plunged 84 basis points to end with a YIELD of 0.02%.

That's right! You buy a 13-week note at today's close, and its effective annual yield gets you 0.02%. No RISK for a 13-week holding period, but 0.02% annualized yield REWARD.

Ah, but that's better than a single day's -4.71% decline for the broader S&P 500 ($SPX.X), but not nearly equivalent to a single day's +11.34% gain in gold as depicted by the StreetTracks Gold Trust (GLD) $85.50 +11.34%, which traded record volume today of just over 65.74 million shares.

Some attributed gold's rise and volume interest as a "flight to safety," but there was also renewed chatter that some foreign central banks might call for re-linking of the greenback, or using a different major global currency as a key benchmark due to the Fed still trying to pump liquidity to ease the credit crunch.

Silver, also found a bid with the iShares Silver Trust (SLV) $11.90 +14.42% getting a bounce after its recent pullback from approximately $20.50/oz highs in March.

U.S. Market Watch - 09/17/08 Close

While gold and silver jumped on the session, there was some type of "rational" tie as the AMEX Gold Bugs ($HUI.X) 314.33 +11.71% tracked a like-commodity higher.

Other commodities displayed in the U.S. Market Watch, even if futures related, showed some buying in Crude Oil. On a broader scale, the CRB Index (CRY) 350.77 +2.81%, where oil is the most HEAVILY weighted commodity, depicted a more modest "safe haven" move.

December Copper (hg08z) $3.0425 -1.50% was off $0.0465/lb.

December mini-Wheat (yw08z) 725 3/4 gained 5.18%, while min-corn (yc08z) 554 rose 4.08%.

Despite some gains in oil, the CBOE Oil Index (OIX.X) 717.18
-2.11% finished in the red having shown some sign of "rationality" just after the 03:00 PM EDT mark was it traded in positive territory to 749 before "the pros sold the close" in a very negative Wall Street tape.


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How negative was the tape today? At one point, approximately 01:51:54 PM EDT, my QCharts service provider reported 1 advancing issue on the NYSE vs. 2,862.

"Junk" bonds as depicted by the closed-end Pacholder High Yield (PHF) $5.55 -20.82% got crushed.

In yesterday's OptionInvestor.com Market Monitor I was noting "behaving badly" at $7.11 -5.20% and began going through our process of checking the PHF's recently updated Net Asset Value (NAV) of bond holdings as of 09/11/08, which was $7.95.

If any of us feel that ANYONE has a handle on implications of the recent Lehman Bros. (NYSE:LEH) $0.13 -56.66% bankruptcy, then here's what some on Wall Street are doing.

Thanks to the Internet bubble, and tighter disclosure rules, CEO's and CFO's try and disclose as much as they "think they know" in order to inform investors. It usually takes some type of problem for industry to realize where some problems take place. Ya think the mortgage industry is going to see some type of regulation eventually?

Market Monitor (Notes/Observations) - 09/17/08

It was around 03:00 PM EDT that I saw a DowJones Newswire report, where some companies had reported to DowJones their exposure to Lehman.

I wasn't, nor could I report all of them (two eyes, and two hands), but I wanted to at least have some observations of "stocks/mutual funds I knew."

Now, in just the past couple of months, I've seen reports of FINAL settlements from BANKRUPTCIES that took place YEARS ago, where bondholders FROM YEARS ago and even some stock holders are just getting their final disbursements.

Some points I must make as it relates to the ABOVE screen capture of the MM and notes is this.

One ... Just understand, as most do, that there are a LOT of companies that have some type of exposure to Lehman, and many banks. Especially their bonds/debt. Remember that BOND HOLDERS come BEFORE common stock holders in bankruptcy proceedings.

Two ... Dynegy up to open-end mutual funds like the Janus Twenty Fund (MUTUAL:JAVLX), which at this evening's NAV tabulation $58.92 -4.39% fell $2.71/share, may have exposure.

Three ... Citigroup (NYSE:C) $14.03 -10.92% may have had "modest exposure" at the 09/16/08 close, but, prior to that, I'd guess, I do not KNOW, that they probably had more than "modest." At today's close, it may be "none" as many banks/brokers have been SELLING ASSETS (bonds, stocks in inventory) in order to RAISE CAPITAL if need be.

Four ... If we think that the DECLINE IN oil and gold the last couple of months was the ONLY ASSET banks/brokers were selling in order to RAISE CAPITAL, then think again.

Five ... NOBODY knows for certain WHEN the selling will end. It MAY have ended today at the close.

Six ... Is Lehman's "break up value" enough to FULLY pay back all debt holders? I (Jeff Bailey) can not offer an informed answer at this time.


MAIN POINT! ... IF YOU'RE 100% LONG, or your 100% SHORT this market, YOU'RE really no different than saying "hit me" in a game of Black Jack with a hand that currently adds up to 18.

Black Jack is a card game where you try and get as close to "21" as you can, without going OVER.

At yesterday's close, the very broad OTC Bullish % (BPOTC) from Dorsey/Wright reversed back lower to "bull correction" status and that had all of the major market BULLISH % reversing back into columns of "O," or more defensive POSTURE!

Chart of the week, and a depiction of "not rational," and "fear."

Do you know what a money market yield looks like? Do you know what a 3-months Certificate of Deposit looks like?

Phone rings ... Hi "your name here," my name is Jeff Bailey and I'm selling Certificates of Deposit that yield 0.02%, are you interested in buying some today?

13-week Treasury Yield

Yep! You hang up the phone. It's kind'a like "do you have any Prince Albert in the can?"

But there was/is SUCH fear in today's MARKET (on Monday, the 13-week yield fell to about 0.75%) that it seems IRRATIONAL behavior to even see that there were enough buyers to drive the YIELD down to 0.02%.

On the far left of the chart "$$$$" I try and show you what $1,000 would be "worth" at 0.00% (You put in $1,000 near 0.00% and you're going to get a REWARD of just about nothing.) When the $IRX.X was up at around 2.00% (2.00% of $1,000 = $980), IF you had placed $980 in a short-term investment like the 13-week, it's be worth about $1000 today, and you'd have gotten about $4.90 in interest payment.

Now, that's on "just" $1000.00, but you can see the REWARD not that much.

But that is a way to actually SEE "fear" in a QUANTITITATIVE amount, and also the MARKET ENVIRONMENT we're in, when such MINISCULE reward profiles look to be so much IN FAVOR.

Now, equating YIELD to what it means in DOLLARS is difficult. I like to have a hypothetical portfolio like the "Beetle's Balanced" at my finger tips at all time, especially moments like these, to see what MARKET participants are doing, and try to rationalize WHY? See/observe the GAINS and the LOSSES.

Here's what $1,000.00 in some asset classes did today. That is, the P/L Today.

Beetle's Balanced Benchmark - $1000.00 in various assets

Quick and dirty here, but I like to look and have tried to teach investors how to look at things from a perspective of RISK, which can be measured in various ways.

Now, if you live in the U.S. and you buy things with dollars, then you've got dollar's in your purse/wallet. Now, today's -1.08% decline in the DXY buys you 1.08% LESS of FOREIGN goods than it bought you yesterday.

The iShares Lehman 1-3year (SHY) is an electronic traded fund (ETF) that would represent SHORTER-TERM Treasury Maturities. At today's close, the 2-year Note YIELD finished at a YIELD of 1.668%. Today, the PRICE of the SHY was up 0.47%.

Now, as it relates to the BOND market, we could step out to the RISKIEST of bond asset classes with the iShares iBoxx Corporate High Yield (HYG) $81.38 -6.00%. This would be the "junk" bond observations. (I use PHF in the Market Watch, as they have been paying $0.075/share/month dividend, and I can quickly calculate its SEC Yield). According to Yahoo! Finance, at tonight's close, the HYG Yield was 8.20%.

JUST FROM THE BOND portion of the Beetle's Balanced, do you see an AVERSION to RISK?

Now, the DXY down about 1% today and GLD and SLV +11% and 14%.

Here we probably do see some "short covering" SLV -12.17% still (20DyNet%) over the last 20-days. Some shorts now locking in gains, some "fear" (new bull, additional bull) buying and you get these types of moves.

What about the S&P 500 Index (SPX.X) ... give me some technicals. Where's "support?"

Give an artist and he'll paint a portrait. It may not look like a fish, but it is a fish.

S&P 500 Index (SPX.X) - Daily Intervals

Last Wednesday's BOTTOM LINE, I thought if the SPX CLOSED below 1,221 it would be a signal of further bearishness. On Friday, the SPX did close below 1,221.

It also closed below MONTHLY S2 (1,215.50). Today's it closes below the current quarter's (July-Sep) QUARTERLY S2.

I can not paint you, or myself a picture of institutional computer support at tonight's close. I would NOT rely on tomorrow's DAILY pivot levels either.

See Tuesday's close under 1,215.50, and MONTHLY S2? "Support broken" becomes resistance as computers need to sell there, for what they bought at Tuesday morning's gap lower.

RESISTANCE 1,215.50. I can paint that picture.

S&P 500 Index (SPX.X) - Conventional retracement

The 13-week Treasury Yield ($IRX.X) has plunged to levels not seen since the Bear Stearns failure of 03/17/08. That when the SPX traded juuuust below 1,271.11 intra-day, to then retrace 50% of that range.

The PINK retracement is "drag it lower still" to today's low. The DOWNWARD green trends are what I would consider to be BEARISH support trends, and ONLY TARGETS for BEARISH TRADERS to lock in some gains.

Why? Is this "the bottom?"

I (Jeff Bailey) cannot answer that. I don't think ANYONE can with any degree of certainty.

The only OBSERVATION of any type of DEMAND outstripping supply on the EQUITY side of things today was the ability of Exxon/Mobil (NYSE:XOM) $75.28 -1.50% to actually give a reversing higher point and figure "buy signal" at $78.00. This came BELOW its bearish resistance trend, but a sign that for some reason, this equity was able to see a trade at a level it used to find enough sellers to keep its price lower.

Major Market Bullish % - to 09/16/08 Close

I haven't yet gotten this evening's updated major market bullish % from Dorsey/Wright, but here's what I've got.

Again, yesterday's 29.96% measure was below the 30.00% measure, and has this the last major market bullish % to reverse back lower.

Some of StockCharts.com's equivalents would be $BPNYA, $BPCOMPQ, $BPSPX, $BPOEX, $BPNDX and $BPINDU if you'd like to look at how these institutionally followed measures of supply(O) and demand (X) are reading.

Levels BELOW 30.00% are deemed "oversold" on a quantitative basis. I would currently NOT be more than 50% of total account LONG. I would currently NOT be more than 30% of total account SHORT.

For "the news," I feel RISK and ACCOUNT management for BULLS and BEARS (see GLD and SLV) is MOST IMPORTANT TO COVER.

SanDisk (NASDAQ:SNDK) $20.92 +39.09% was a percentage gainer today that had the "Disk Drives" higher after Samsung made an offer to buy the company for $5.85 billion, or $26.00/share. SanDisk rejected the offer (at time of this writing), calling Samsung "opportunistic."

EIA inventory levels ... not much "surprise." Draws pretty much across the board due to recent hurricane activity. Crude oil down 6.3 million barrels to 291.7 million. Total Gasoline down 3.3 million barrels to 184.6 million. Refinery percent utilization edged down to 77.41% from prior week's 78.27%. Still getting some updates from various companies on when power will be restored and back up and running. Current estimate looks to be about a week.

New Plays

Most Recent Plays

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New Option Plays
Call Options Plays
Put Options Plays
Strangle Options Plays
DDM None None

Play Editor's Note: Have you heard the term "blood in the streets"? It's part of an old Wall Street maxim to "buy when there is blood in the streets" and quite frankly I can't remember a time when there was so much "blood". Essentially it is a reminder that the market moves on emotion not rational, logical thought. Right now emotions are running high and everyone is afraid. Investors are so scared that short-term U.S. t-bills are trading with virtually zero yield (0%). Everyone is running for their lives into the presumed safety of government bonds. They have reason to be scared. Venerable Wall Street firms are falling like dominos. Fannie and Freddie have been seized by the government. Credit markets are freezing. Some countries are going so far as to close their stock markets altogether to halt the decline in stock prices.

The contrarian trade here is to buy this weakness. Unfortunately, as hard as I looked I couldn't find anything that we really wanted to buy. The best bet to me looks like buying puts on the Volatility Index (VIX) and we added that play yesterday. Speaking of the VIX, I think it will go higher tomorrow morning before reversing. If you have access during the day tomorrow may be a good entry point to buy those puts. I would use October or November strikes if you want more time. The safer bet is probably November puts.

Part of the challenge is conditioning. We're told over and over not to try and pick bottoms or to try and catch the "falling knife" and for good reason. Most of the time you're going to get hurt trying to jump in when we haven't hit bottom yet. The worst part is that when stocks do bounce from a huge sell-off they tend to bounce back fast and then you berate yourself for missing the move and not buying the "bottom". Well, we didn't know it was the bottom until after it happened. If you're a true, long-term investor then buying weakness like this is probably okay. You're going to hold that position for years. This newsletter isn't about long-term investing. We're trying to catch the quick trade and honestly this has been a tough game lately.

What I am suggesting right now is to sit back and wait for the smoke to clear. We don't have to enter bullish positions at the very bottom. We can still capture part of the move once the bounce has started. Most of the time significant bottoms get re-tested anyway so it's not like we won't get another chance. Be patient. Right now the best use of you time might be to look through the market and make notes on what stocks you would consider buying if they got low enough or near significant support.

New Calls

Ultra Dow 30 ProShares - DDM - cls: 52.79 chg: -4.50 stop: *

Company Description:
The Ultra (long) Dow 30 ProShares (DDM) is an exchange traded fund (ETF) that delivers twice the daily performance of the Dow Jones Industrial Average.

Why We Like It:
We are going to try and take advantage of the "blood in the streets" with a very speculative and highly aggressive call play on the DDM. Why the DDM? Because it will deliver twice the performance of the DJIA. Of course that is a two-edged sword. Here's the plan. Readers could look for a dip near $50.00 to buy calls on the DDM or wait and watch for when the selling begins to stall intraday tomorrow. We, the newsletter, don't have the luxury of waiting and watching so we're going to take a stab at an intraday entry point. Stocks closed at their lows today and the VIX closed at its high. Odds are good there will be some follow through lower for stocks tomorrow morning. I am suggesting readers open bullish call positions between 10:30 a.m. and noon tomorrow. We'll use 11:00 a.m. as our entry point. Our stop loss will be 5% under our entry price. Our first target is a 10% gain. We'll set a second target tomorrow once we find out what our entry price is. This should be considered a very aggressive, high-risk play. Volatility is surging and that makes the options we buy a lot more expensive. The DDM could bounce sharply but if the VIX collapses too fast our options values could actually go down short-term. Plus, we're trying to catch the proverbial knife and too often traders get cut in this sort of exercise. Sometimes the best play is to do nothing. If you're not feeling nimble then just sit out on this one (but see tonight's play editor's note).

Suggested Options:
We're suggesting readers buy calls on the DDM at 11:00 a.m. (Eastern time zone) on Thursday. Volatility is very high right now and that temporarily inflates all the option premiums. We'd pick a strike that is 3 to 5 strikes out of the money. Example if we open the play at $51.00 on the DDM then buy the $54 or $55 strike price.

***ALERT*** - I just looked at the bid/ask spread on these DDM options. These spreads are so wide they look like errors. If you can't buy these with a spread of $1.00 or less, and quite honestly a $1.00 spread is horrendous, then don't buy them! Instead consider this same play on the S&P 500 double-long (symbol SSO). I'll check tomorrow... if we have to we'll switch to the SSO.

BUY CALL OCT 54.00 DMB-JB open interest= 21 current ask $6.10
BUY CALL OCT 55.00 DMB-JC open interest= 88 current ask $5.70
BUY CALL OCT 58.00 DMB-JF open interest= 38 current ask $2.95

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 3.1 million

New Puts

None today.

New Strangles

None today.

Play Updates

Updates On Latest Picks

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Call Updates

Amer. Intl.Group - AIG - cls: 2.05 chg: -1.70 stop: n/a

News of an $85 billion loan from the U.S. government to AIG to prevent the company from filing bankruptcy did little to alleviate fears in the financial sector. Shares of AIG gapped open lower at $2.29 and spent the session hovering near the $2.00 level. Our plan was to buy AIG at the open this morning and then sell a covered call. Our pick was the January 2009 $5.00 call. The call opened at 86 cents and is currently trading around 55 cents. If we use the 55-cent number then our cost basis in AIG is about $1.74/share ($2.29 stock minus the 55-cent call). This is a speculative bet that AIG will survive and that shares will bounce to $5.00 or more before January 2009 option expiration. If AIG does trade at $5.00 or higher we expect to be called out. Our appreciation on the stock should be 118% when we get called out. More conservative traders may want to play with some sort of stop loss. An example would be a stop loss at $1.49 or $0.99. However, if you do play with a stop loss on the stock you have to buy back your outstanding call option position otherwise it would be a naked call position, which would create unlimited risk for you. We are not using a stop loss. Volatility in the financials will continue and AIG could easily see some intraday spikes lower.

Picked on September 17 at $ 2.29 *opened at $2.29
Change since picked: - 0.24
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 69.8 million


SPDR S&P Oil - XOP - cls: 45.65 chg: -1.05 stop: 42.39

A $6.00 rally in crude oil was not enough to stem the selling in energy stocks. Today investors were marching to the "sell first, ask questions later" drum beat. The energy sector did fare better than the broader market and the XOP only lost 2% versus a 4.7% decline in the S&P 500. We would use another dip near $44.00 or $43.00 as a bullish entry point but in this market we'd wait for signs of a bounce first before considering new call positions. We have two targets. Our first target is $49.95. Our second target is $53.50.

Picked on September 16 at $ 46.70
Change since picked: - 1.05
Earnings Date 00/00/00
Average Daily Volume = 2.0 million

Put Updates

Lamar Advertising - LAMR - cls: 34.85 chg: -1.04 stop: 37.55*new*

I am a little surprised that LAMR did not show more weakness today. The stock only lost 2.9% but shares did close under the $35.00 level. The trend remains bearish and we're adjusting our stop loss to $37.55. We want to remind readers that stocks in general are very oversold and with the VIX this high it's predicting a bounce soon. This may not be a good atmosphere to open new bearish positions. Our target is the 31.50 mark. More aggressive traders could aim for a new relative low.

Picked on September 15 at $ 35.90 *triggered
Change since picked: - 1.05
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 1.4 million


Volatility Index - VIX - cls: 30.30 chg: -1.40 stop: n/a

The VIX gapped open around 32.00 and then surged past the 36.00 level as the market accelerated lower into the closing bell. We warned readers yesterday that these were crazy days in the market and that the VIX could spike to new highs before reversing lower. The high on January 20, 2008 was 37.57 and the high on August 12, 2007 was 37.50. Readers over 35.00 are pretty uncommon but there were several readings above 40.00 following the market top in 2000. The post 9/11 drop sent the VIX to 57.31, which is probably a record. I see today's surge in the VIX as just a better entry point to buy puts. If you didn't buy puts this morning we would definitely buy puts tonight. We're setting our first target at 25.50. Our second target is 21.00. It's up to you if you want to play the October puts or the November puts.

Picked on September 16 at = 30.30
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = --- million

Strangle Updates


Dropped Calls


Dropped Puts

Roper Industries - ROP - cls: 56.92 chg: -1.65 stop: 59.15

The DJIA is down more than 800 points this week and the S&P 500 is sinking to new multi-year lows. Yet shares of ROP are still stuck in a trading range above the $55.00 level. The overall trend is bearish but the stock just isn't cooperating. We're cutting this one loose. Let's not tie up our capital in something that isn't moving with the market this volatile.

Picked on September 03 at $ 58.19 /early exit 56.92
Change since picked: - 1.29
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume = 664 thousand

Dropped Strangles



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