Who is next on the list for a goverment bailout?  With LEH down 30% this morning, it is looking more and more likely that this will be the next event.  A shotgun wedding for LEH and BAC?  Do I hear 2 dollars a share again?  Maybe some type of reward for following through with that terrible Countrywide deal?  The giddiness of the FRE and FNM bailouts is starting to wear off and reality is sinking back in. 

BA

As we await news of another government bailout of a public company this weekend, the over-riding theme of this year is: trust the government.  The news of what form this latest bailout will take will be announced before the open of Asian markets on Sunday.  If the equity holders of FRE and FNM aren’t completley wiped out, then there should be a criminal investigation.  The equity holders of Bear Stearns should have been wiped-out.  The liberal use of taxpayer money to support risk taking enterprises is criminal.  This year is turning out to be one of the most historic in the history of this country.

Trust the government to report numbers correctly.  The official job loss yesterday was a loss of 84k.  This number includes the fairy tale birth/death adjustment of +125k.  Does anyone really believe that construction and finance actually added jobs last month?

As for the market,  I have said this all of this year.  This decade has been led by an unprecedented credit expansion.  The market has rocketed higher on cheaper and cheaper credit.  Now, we are facing the opposite of this, a credit depression.  Easy credit is gone.  The market will continue to grind lower into year-end.  This will take years to correct itself, not months.

BA

Friday’s stock markets tested the July lows, providing us with a daily hammer that could be an early indicator that the worst could be over. We will need confirmation from an up day on Monday, but considering the oversold nature of the market we are in position to at least bounce from this position. The problem is that the weekly charts do not look good, so it could easily just be a bear market rally. We will continue to watch the markets closely this week to see if the markets can make some kind of decision, or if we are still playing a waiting game.

JD

The stock market continues to consolidate at relatively low levels. Bears keep knocking the market down with each piece of bad news on the economy while Bulls continue to prop up the financial markets every time the price of oil and other commodities falls.

Both the DJIA and the SP 500 are hugging their 50 day MA while their trading ranges have tightened over the last month. The DJIA is now trading between 11, 200 and 11, 800, with the SP 500 bouncing between 1250 and 1300.  Just when you thought the Technology stocks in the Nasdaq were going to pull the stock market out of the summer doldrums, these stocks apparently decided to join the consolidation club to linger once again between its 50 day MA and 200 day MA.

While another Iron Condor could work going into September options expiration, the drop in volatility in the last month means that the premium you would receive for putting on one of those trades probably does not make them worth the risk.

The people doing best in this market are active traders. Market moves are not lasting more than 2 or 3 days, so trading puts and calls would be a better idea than spreads right now.  That being said, since stocks could break out of this trading range at any time, you need stops in place to protect yourself from sudden market moves that go against you.

If you do not have the time to be an active trader, you may be better off sitting on the sidelines until this market gives us a better indication on which direction it wants to go next.

JD

The Stock Market started the week falling from the weight of being overbought, while Oil bounced up from being oversold. In the  end, not much happened with stocks being slightly down and oil ending slightly up.

The DJIA and SP 500 ended the week with a lower high than each of the last couple of weeks, a sign that stocks are now just drifting lower along their 50 day MA. It looked like the Nasdaq had a shot to break out over the resistance of its 200 day MA, but that line of demarcation continues to hold technology stocks back.

Not a lot to write about this week, as the financial markets continue to exhibit trading range behavior.

JD

The Iron Condor we suggested in late July expired worthless, so if you put that one on, you were able to keep all of the premium. The problem with that trade though, was the fact that the DJX was actually above 118 this week on an intraday basis, but never closed above that resistance level. While holding on would have produced a profitable trade, it is possible that you could have been stopped out at the break even level depending on the amount of risk you decided to take.

The 20% fall in the price of oil in the last month has certainly helped the stock market, but the DJIA is still showing signs that it is in a trading range, as it has had trouble trying to break out above resistance at 11,800. The SP 500 has looked a little better, closing the week above its 50 day MA. The Nasdaq, on the other hand has been strong in the last month, picking up 10 % since the July lows. It is now above both its 50 day MA and 200 day MA. Thats a sign that institutional investors are moving into Technology stocks.

The financial markets appear to be a little overbought at this time, but if oil continues to fall, they could continue that way for a while. On the other hand, it would not take much in the way of news to push the stock market back down again. This week could go a long way toward letting us know if it is time to start buying. Bullish Option Strategies like the Bull Call Spread or the Bull Put Spread will let you participate if a market rally comes to fruition, without you having to risk a large amount of capital.

JD

Yesterday the DJIA and the SP 500 tried to breakout of their trading ranges, but their July highs and falling 50 day MA stopped them dead in their tracks. That failure, a poor jobs report, and the first day of rising oil prices in a week (now how strange is that to read given the historic rise over the last year), combined to knock the stock market back into the middle of its range of the past month.  Every time the market has a triple digit up day, it seems to be followed in a day or two with a triple digit fall. No different this week.

If you tried the Iron Condor we suggested about 10 days ago, yesterday’s move may have sent you scrambling to look into how to get out of it without getting into too much trouble. As it turned out, the DJX once again did not break through resistance. A better idea may have been to use that opportunity to take some profits off the table by buying back the Put half of the spread for very little money.

Eventually, this market will breakout in one direction or the other.  I just do not think it will happen until everyone gets back from summer vacation.

JD

The market tried to break out on both sides of its current consolidation and failed to do either. The stock market finished this week almost exactly where it ended last week. We could not have asked for a better finish to the week for the Iron Condor we suggested last week. That being said, both sides of the trade looked like they could have been in trouble at times during the middle of the week. An active trader with good timing could have bought back both sides (at different times) for a small profit, whereas those planning to hold the trade until expiration to capture the premium are still looking food. Unless some big news hits the wires in the next couple of weeks, I expect the market to continue in this trading range for a while.

JD

We did not have any follow through on last week’s hammer candlestick on the DJIA and SP 500. It could be a good time to take that summer vacation. Looks like the financial markets are headed for a trading range for a while, which is actually an improvement from the bearish tone we have displayed this year. We are no longer oversold and I do not see anything that is going to push the market up very far. Even if oil continues its recent down trend in price, there is still too much other bad news on the economy to give this market much of a lift.

One way to play a trading range market is with an Iron Condor on the DJX. Since we have support at 110 and resistance at 118, you could structure this trade by selling the DJX Aug 110 put and the DJX Aug 118 call, while purchasing the DJX Aug 108 put and the DJX Aug 120 call to protect your sold options. If the DJX is still within this trading range by the August expiration, you would get to keep the credit you receive when placing this trade.

JD

OK, so we had a better follow through on Thursday than I expected, but Friday’s big fall in Technology stocks was probably enough to put an end to a two day short covering rally. While daily stock charts are starting to show signs of a turn around, we still have a long way to go on a weekly basis. We will soon see if the S&P 500 and the DJIA can build on the past week’s lows and establish support at 1200 and 11,000 respectively or if this was just a breather in the current bear market.

JD