Just when you thought it would never be safe get back in the water, the SP 500 picked up almost 20% last week, the DJIA 17%, and the Nasdaq 14%.  The big problem with this bounce is that it was done on weak volume over a holiday shortened week. While we may have put in a bottom for at least the short term, if you did not get in with your bullish plays by last Tuesday morning, I cannot see chasing the market this week. It would be better to wait for a pull back to somewhere around 850 on the SP 500 or 8200 on the DJIA for a confirmation of this turnaround with a higher low. When that happens, you will have a better entry point for some of the strategies Bob and I wrote about last week.

JD

Okay, so we have just went through the greatest wealth destruction in the history of the nation.  If you had been listening to this blog the whole way, you would have been much better off.   We have been preaching defense the entire time.  Now its time to begin looking for offensive plays.  Its time to start taking advantage of the extreme volatility.  I would recommend doing cash covered puts in quality stocks that have a very good chance of being here in 10 years.  Here is a short list: WMT, JNJ, MCD, KO, MSFT, XOM.  As you can see, the list is all Dow stocks.  A cash covered put means that you have the cash on hand to take delivery of the stock if the put is exercised.  You can get into these stocks at levels that are at least 20% lower than the current price.  If you don’t get the stock, you walk away with a nice 5%-10% return in 3 months.  I will give a quick example with MCD.  Lets say that you have 55k to invest.  Instead of buying 1000 shares at 55, you would sell 10 Jan 50 puts for 3.  At January expiration if the stock is above 50, you keep the 3000 dollars, a 5 1/2% return in 60 days.  If the stock closes at 50 or lower, you buy the stock at a break-even point of 47.  The only downside would be a huge rally in MCD in the next 60 days, something most investors aren’t worried about these days.

BA

The SP 500 blew through support at 850 this week to win the race as the first major index to reach its 2002 lows. The DJIA was not far behind, while the Nasdaq still actually has a way to go. Even with Friday’s uptick, the only good thing you might be able to say is that the stock market plunge is losing momentum.

The Bear Call Spreads we suggested for November would have expired worthless, allowing you to keep the premium you collected. That strategy will probably work again for December. If you were real aggressive, buying puts would have been even more profitable. With the market decline starting to run out of steam, they may not be as profitable.

Are you ready to start playing for a turn around? Bull Call Spreads, Bull Call Diagonal Spreads,  or Bull Put Spreads might be safer strategies than buying stocks or ETFs directly.

JD

The SP 500 is hanging around at the 850 level once again, looking like its downward motion is losing steam. While the good news is that the panic selling appears to have subsided for now, there just does not seem to be anyone interested in buying, a characteristic of a bear market that could last quite a while.

The market could easily drift further south through support. The VIX is only at 70, far short of Octobers peak of 80. If we close below today’s levels, look for a test of the 2002 lows of 7200 on the DJIA, 1100 on the Nasdaq, and 770 on the SP 500.

Bear Call Spreads still look like a good trade in this market, though you will get more for your money if you wait for a bounce.

JD

And you thought I was going to write about the Election.  After a brutal day in the stock market to celebrate the election of a new president, I wondered to myself: ‘Is the consensus always wrong in the voting booth, just like it is in the stock market?’  Only time will tell.

While a few of my trading colleagues pointed out that the divergence I wrote about last time for the SP 500 was only true on a closing basis, not intraday, the fact that 199 of 300 optionable stocks and ETFs that I scan showed up on the same screen that I ran after the market closed on Halloween leads me to believe that the worst may be over.  What I am looking for now is the confirmation of a higher low, maybe somewhere in the area of 900, which has been an area of support in the past.

For now, we continue to exhibit the characteristics of a trading range market, which from an investing point of view is a lot better than a down trend. Anyone that put on a Bear Call Spread that I suggested on October 25th might have been stressed out on Election Day, but I am sure you are happier today. Of course if we were perfect, the best time to put that trade on was at the close yesterday.

So which signal was the winner? At this point, you could make an argument for either one. The market has not resolved itself yet, so all we can do is watch it unfold and take advantage of the opportunities it presents.

JD