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.
Ultra Dow 30 ProShares - DDM - cls: 52.79 chg: -4.50 stop: *
Why We Like It:
***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
Picked on September xx at $ xx.xx <-- see TRIGGER