Option Investor

Waving the White Flag

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How do we react to the wildest week I have ever seen in the markets? The financial markets were being whipped into a frenzy by daily news events and the government is stepping in daily to manage the outcome. This is not a market. It is a financial system being reported by the National Enquirer.

The government banned short selling on 799 stocks in a quadruple witching expiration week. Since option market makers cover themselves when they sell us puts by shorting the stock this was a very nasty event. Sure it was only financial stocks but that makes up the biggest sector of the stock market and therefore the majority of any index fund. It should surprise nobody that the markets reacted strongly to the news. Volume across all exchanges was more than 18 billion shares on Thursday and a new record.

If that was not enough the government announced a plan to announce (not a typo) the erasure of half a trillion in bad mortgages off the books of banks suffering under the crush of bad loans. What market would not rally when the Fed and Treasury announced they were going to sprinkle fairy dust on bad balance sheets. If only they had acted two weeks earlier Lehman and Merrill would still be independent.

The price of oil is not related to financial stocks in the strictest sense but it rallied nearly $15 from the Tuesday lows. Did peak oil suddenly appear? Not unless I missed the announcement. Oil inventories were down sharply at -6 million barrels but that was far less than most whisper numbers. Gasoline inventories at 184 million barrels were at the lowest level since records have been kept starting in 1990 but we already knew than before the inventory report.

There were multiple reasons for oil rising, including the approaching expiration of the October contract on Monday, but the main reason was simply short covering and general market hysteria. If you can no longer short financials and the Fed is going to magically heal the financial sector then funds have to find someplace to put all that money they made shorting banks. Commodities suddenly looked like a safe haven since the dollar was going to tank on the massive government bailout of our financial system. The U.S. dollar index fell nearly 300 basis points over just the last week. The new 12-month high in the dollar on 9/11 was quickly turned into a new two week low.

It is impossible to invest in this market. You can trade it if your time in the position is measured in minutes instead of days but you can't invest in it. Goldman Sachs had a $68 range for the week. Several energy stocks had a $20 range. The monster intraday swings make holding any position with a stop loss a loss period. I have never seen a market so volatile with 400 point swings commonplace.

Will next week be any different? I sure hope so but until a trend actually appears I think we need to watch from the sidelines.

I just arrived in Sacramento for the Peak Oil conference, which begins on Sunday for three days. I am sure the news from the last two weeks will be on everyone's discussion list. I will be reporting daily in the nightly emails on what we heard and what everyone expects. Maybe by this time next week the markets will have cooled and we can return to taking a position that last more than a couple days. At least we will have the most current information available about the fundamentals of the oil market. That does not guarantee an instant profit but at least gives us a base from which to plan.

Jim Brown

October Crude Futures Chart - Daily

October Natural Gas Futures Chart - Daily

October Gasoline Futures Chart - RBOB Daily


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