A strong rebound in Europe and Japan carried over into the futures for the U.S. markets causing a huge short squeeze at the open. The early gains faded intraday but a large number of quarter end buy on close orders lifted the indexes to their highs.

The third quarter was the worst quarter for the markets since 2011. All three major indexes ended in the red for the quarter. The Dow lost -7.6%, Nasdaq -7.4% and S&P -7.0%. The biotech sector lost -17.8% and the worst quarter since 2002. The Dow has now lost ground in three straight quarters and the first time since 2009. This has only happened three times in the last 40 years.

On Tuesday, the S&P came within 4 points of retesting the August low at 1,867. Today it added +36 points to close at 1,919. The Dow added +235 and the Nasdaq +103. This does not mean the selling is over. I warned in my Tuesday night commentary that a monster short squeeze was probably lurking in our future.

The indexes are still in a downtrend because one day of gains does not make a rally. The S&P is still about 30 points below strong resistance at 1,950. The Russell 2000 gained +17 points but that only returned the index to resistance at 1,100.

While I would like to think that the Tuesday low was a successful retest, we will not know for sure until weeks from now. End of quarter market movements are hard to predict and especially when they start with a monster short squeeze.

The S&P futures opened down -7 tonight but we all know that could be easily erased before Thursday's open. Historically, the first ten days of October are known for market bottoms. The portfolio restructuring in the first week of October typically produces a significant dip and that dip is eventually bought to begin the yearend rally.

I added a couple more October positions with only 12 trading days left until expiration. Next week we will shift to November positions.

Jim Brown

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Current Portfolio

Current positions

Items shaded in blue were previously closed.

Current Position Changes

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

XBI - S&P Biotech ETF (Closed)

The breakdown in the biotech sector gained speed on Thursday and continued to accelerate today. We were stopped out on the short side of the put spread on Friday and Monday's 5% decline in biotechs spiked the premiums significantly.

I recommended we close this position on Tuesday.

Closed Oct $60 Long put, entry .42, exit 3.58, +3.16 gain
Previously stopped Oct $67 Short put, entry $1.31, exit $2.20, -.88 loss
Net gain $2.28

AET - Aetna (Closed)

Aetna cratered on Thursday when the first hint of damage in the health care sector appeared. The biotech implosion contaminated the health care stocks in guilt by association. The high cost of drugs and the number of companies raising drug prices caused investors to flee anything health related. Aetna's decline accelerated with a nearly -$7 drop on Monday.

I recommended we close the long put on Tuesday.

Closed Oct Long $105 put, entry .63, exit $4.25, +3.62 gain.
Previously closed Oct Short $110 put, entry 1.40, exit 1.89, -.49 loss.
Net gain $3.13

QIHU - Qihoo Technology (Closed)

I am recommending we close the long call on Tuesday after Qihoo lost -$2.50 on Monday. The premium evaporated before the open and we only received 5 cents for the long call.

Closed Oct Long $55 call, entry .24, exit .05, - 19 cent loss.
Previously closed Oct Short $50 call, entry 1.00, exit 1.12, -.12 loss.
Net loss 31 cents.

New Recommendations

XOP - Exploration ETF (Call Spread)

Oil prices are stuck between $44-$46 and inventories are starting to rise. As inventories gain each weak we should see energy equities decline. Today's short squeeze bounce should be short lived. Energy companies are expected to see earnings decline -65% in Q3 and that is another reason prices should fall.

Sell short Oct $35 call, currently 49 cents, stop loss $34.45
Buy long Oct $38 call, currently 11 cents, no stop loss.
Net credit 38 cents.

OUTR - Outerwall (Call Spread)

Outerwall is the owner of all the Redbox DVD kiosks around the country. Unfortunately with the number of online streaming options today from VUDU, Netflix, HULU, etc, their sales are crashing. They reported horrible numbers in August and analysts are downgrading the outlook for Q3.

Earnings are Oct 29th.

Sell short Oct $60 call, currently .70, stop loss $58.55
Buy long Oct $65 call, currently .30, no stop.
Net credit 40 cents.

Existing Play Recommendations

Links to original play recommendation

CAT - Caterpillar (Bear Call Spread)

RRC - Range Resources (Bear Call Spread)

QIHU - Qihoo Technology (Bear Call Spread)

WYNN - Wynn Resorts (Bear Call Spread)

RRC - Range Resources (Reentry Bear Call Spread)

CAT - Caterpillar (Reentry Bear Call Spread)

AET - Aetna (Bull Put Spread)

XBI - Biotech ETF (Bull Put Spread)

Prices Quoted in Newsletter

At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.

The prices quoted in the newsletter are the end of day prices in most cases.

When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.

For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time the readers are able to get a better fill than the opening print because of market maker bias at the open.

For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.

All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.