Every momentum indicator known to man is telling us that this market is oversold. The only problem with oversold markets is that they can stay that way for a long time. This could be one of those times. The DJIA went crashing though the 12,000 level like it was not even there. You might recall that this level managed to hold up in March 2008, January 2008, and March of 2007. We have not seen these levels since the middle of 2006.

Buy and Hold investors may actually be losing ground over the last two years. When you consider the drop in home values over the last couple of years, the economy certainly is not painting a pretty picture. Had you been reading our blog in 2008, you might have been inclined to take some of your equity investments off the table. If you do not like to babysit your retirement funds, a well diversified portfolio would have helped you weather the storm. One place for a good read on asset allocation is the Insightful Investing Newsletter.

We could certainly see a bounce here that active traders can use to take advantage of some new bearish option trades, but for most of us this might be a good week to enjoy the upcoming holiday. No junior, I do not think we are there yet. If your are good boy, we might stop for a minute and pick up an ice cream cone, and you’d better enjoy it while you can. We may still have a long way to go, like maybe another 500 points down for the DJIA. Let’s hope not, but it would not surprise me at all. Maybe we can get the stock market a GPS, after all, nothing else seems to be helping.

JD

The FED told us they were concerned with both the economy and inflation. Well guess what? So is everyone else. The reaction to these comments was subdued at the start. Option bid/ask spreads did not widen even close to the extent that they usually do after Uncle Ben speaks.

Eventually as the day finished out volatility increased in the stock market. The DJIA shot up over 100 points, but eventually settled in just about unchanged. The Nasdaq continued to distance itself from the rest of the pack by posting a gain of almost 1.5%. The problem from a contrarian point of view is that the volume was lower than the previous day.

There certainly has not been any news that would indicate that the economy is has started heading in the right direction. The Nasdaq is holding up better than the DJIA and the SP500 because it includes a lot of technology stocks, and no financial stocks. Besides that, money managers have to put their money somewhere and they, like me, want no part of the financials.

For those of you who like to hedge your bets, It turns out that one of the best plays for 2008 would have been to be long the QQQQ and short the DIA. Even better would have been to be long the XLE and short the XLF, but we’re not looking for perfection here. Option players could have put on a funky straddle with Calls on the QQQQ and Puts on the DIA. Of course this is easy to see in hindsight, so I for one would not take this approach. I preferred bearish spreads on the DJX. That proved to be worth the effort. The question now is will they continue to work?

So how would you play it if you agreed with me that there may not be a lot of downside left, yet you do not think this market is ready for a turn around. As we have said a few times already this year, the Bear Call Spread is your safest bet. An example of this would be to Sell the July DJX 123 call and buy the July DJX 125 to cover yourself. With resistance on the DJIA at 12,250 the probability of success is pretty good…and the DJIA does not have to drop another point for you to keep your credit.

JD

The DJIA is only a day away from testing its March lows. The SP 500 is two or three days away. The NASDAQ, on the other hand, has held up well since March as the bulls think that Technology stocks are going to lead the way to the promised land. If the NASDAQ tests its lows in less than a week, we would have a sure sign of market capitulation. That could also be a good time to buy in anticipation of a bounce.

More likely though, it could take weeks for the NASDAQ to get that far, if it gets there at all. Its strong relative strength is a good indicator that Technology stocks will lead the way to recovery, but there is no need to hurry to get on that bandwagon. It appears that the financial stocks are not finished trying to drag the rest of the economy down with them.

As Bob has said many times stay defensive. Maybe it would be a good time to move to cash and take your kids on a summer vacation. That could be a lot less expensive that staying fully invested. If you want to be active, more bear call spreads may prove worthwhile for July, just as they did for the June expiration.

JD

The market continues to get pounded. There seems to be a new bomb everyday. A few days ago it was LEH. Today, MF and FITB dropped bombs. The CFC combo that was recommended last month should be bought in for a nice profit. The bond market is completely confused. One day they are pricing in rate rises, the next day they are taking them out. The truth is that the fiscal stimulus that consumers are getting right now is doing the trick. When this wears off, look out below! To top it all off, a respected analyst at RBS called for a major crash within the next 3 months. All of this is not conducive to putting more money to work. For the last 1000 points in the DOW, this site has been saying to stay defensive. So STAY DEFENSIVE!

BA

The bulls would call Friday’s action a bounce, but the bears would point out that while the market was up, the volume was down. While the Nasdaq managed to claw its way back above its 50 day MA, there there is still plenty of overhead resistance.

It was a tough week for bonds thanks to higher inflation expectations, thanks in part to a 0.6% rise in the CPI index. Since most of that was due to higher food and energy prices the bulls think that means we do not really need to be concerned with inflation. If the consumer only has money to buy food and gas, that can not be good for the economy. Last I knew if the economy was having a tough time, that can not be good for the stock market. Friday’s move might just give you a better opportunity for some bearish options trades.

JD

The Nasdaq joined the S&P 500 and the DJIA in their tail spin by crashing though its 50 day MA. It was only a matter of time. Oil failed to break Friday’s high, but that did not provide any relief. The DJIA is on its way to 12,000 and the S&P 500 will certainly find 1325. If higher oil prices were not bad enough, flooding in the Midwest gave grains a big kick start today. The March lows are within easy reach, especially for the DJIA. The probability of that level being tested looks like it will happen before we ever get a shot at passing the May highs. Say by the end of this week maybe?

Hold on for the ride. Its not likely to be smooth.

JD

Unfortunately, the DJIA won its battle with the NASDAQ, leading the markets down this week. It blew through prior lows like they were not even there on Friday. The only thing seemingly holding up the DOW was the low end of its Bollinger Bands, but on recent charts that has done nothing more than slow it down. While we might get a slight bounce on Monday because of this, I certainly would not count on this.

While the NDX chart doesn’t look as bad as the DJX or SPX, it certainly does not look like a safe haven. Keep your eyes on it though. Its recent strength point to the fact that Technology stocks are likely to lead the markets back, just do not hold your breath waiting for that to happen.

There were two major news items that led to the carnage on Friday, a 5.5% unemployment rate and $139 oil. People losing jobs, and higher inflation are certainly going to take their toll on consumer confidence.

As Bob would say, no reason to be a hero now. Use any bounces to lighten up on your long positions.

JD

The market got hit again today after rumors started flying in the afternoon. First, it was a rumor of a bank in California having problems. Then, Lehman had to come out and deny that they had tapped the Fed for cash. The bottom line is that risk aversion is in full swing. The yield curve rocketed steeper for a second day in a row as people ran for the 10 year again. I don’t know whats going on, but things are smoking so there must be a fire somewhere. Bernacke briefly helped things in the morning when he made some comments to support the dollar. Hopefully, everyone took advantage of the rally we had a few weeks ago and either did some selling or bought some protection.

BA

Are technology stocks and the NASDAQ going to succeed in pulling this market up again, or will the DJIA lead this market back down?

The NASDAQ chart looks strong with its second close above its 200 day MA in the last month.

The DJIA, on the other hand, is still being held back by its 50 day MA, never mind its 200 day MA.

The SP 500 is stuck in between the two after weakly bouncing off its 50 day MA earlier in the week.

The one thing that does seem to be apparent is that bonds are taking a hit since the FED pretty much confirmed that interest rates will not be getting any lower.

The bear call spread ideas I suggested 10 days ago still look good.

JD