The market gave back Friday’s gains yesterday as worries about the financial sector heated up once again. The main culprit these days seems to be American International Group (AIG, $18.78, down $1.09) which hit another 52-week low yesterday. This seemed to ignite fears that the deterioration of the credit markets will bring more losses for financial companies. Duh. Wall Street did a good job of keeping that Gennie in the bottle, huh? I wish I had some good news on the sector but if you’ve been reading the blog you know I still don’t trust the financials but I will play some of the bounces.

The Dow Jones fell 241 points, and ended the day at 11,286. The Nasdaq dropped nearly 50 points and finished at 2,365 while the S&P closed 25 points lower at 1,266. Of the 30 stocks that make up the Dow, AIG was the steepest decliner. A cut on the stock’s price target and the fact that the company may also have its credit rating slashed weighed heavy on AIG. The shares are at their lowest levels in 13 years. AIG accounts for 1.34% of the Dow’s 30 weighted stocks and ranks 28th on how much it accounts for the change in the Dow. By contrast, IBM makes up 8.79% of the index and is 1st.

I have been timid to profile a put trade on AIG because I’ve was expecting a bounce like some of the other financial stocks. However, when the stock touched a low of $19.73 on July 15, we should’ve known that it would be back in the teens before too long. AIG is in real trouble and I wouldn’t rule out a dip below $15 in the near future. The September 18 puts (AIGUS) closed at $1.32 yesterday.

Lehman Brothers Holdings (LEH, $13.45, down $0.96) was one of those “bounces” I played in the sector and we were in and out of a Lehman trade in two days for a 70% gain. Monday’s drop puts the stock back to where our original entry point was. The stock surged Friday following reports that a bid was forthcoming but that quickly got shot down like a skeet target after South Korea’s financial regulator said that it might not be a good idea if the Korean Development Bank made a bid.

What was weird was the enthusiasm in Freddie Mac (FRE, $3.29, up $0.48) after another debt offering. Freddie rose 17% after issuing $2 billion worth of debt. Wow. I can’t believe I just typed that. On a day the Dow was down nearly 250 points, both Freddie and Fannie Mae (FNM, $5.19, up $0.19) were up. Throw in the fact that the Existing Home Sales report painted another bad picture for the housing market makes it a miracle that these stocks managed to trade higher. Normally when a company issues $2 billion in debt the stock goes the other way. Now can you see why the financial stocks can’t be trusted?

Of course, I happen to love the volatility because it provides you the opportunity to make money in up and down markets. Hence our OptionMentoring.com slogan. As far as the current market, we could be setting up for a pretty negative week unless some “good news” miracle happens. There are a lot of economic reports due out this week and Wall Street is looking towards next Monday’s day off as the summer vacations start to wind down. I am expecting light volume and a downtrend at least through the holiday.

Rick Rouse
Rick@OptionsMentoring.com

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