Wall Street was jolted again on Monday as the Dow was on the verge of its biggest loss ever. At one point, the index was down 800 points before a late rally helped cut cut the loss in half. Still, with the Dow finishing 370 points (3.6%) lower for the day there was no celebrating going on. The Dow closed below 10,000 for the first time since 2004 and ended the session at 9,955.

Just how bad was it? The advance/decline was 200 to 3,000. The drop below 10,000 was something we were expecting but the Dow cut through that level like a hot knife on butter, trading to a low of 9,525. The Nasdaq was hit the hardest as it dropped 84 points, or 4.34%, to 1,862. The S&P 500 gave up 42 points, or 3.9%, and closed at 1,056.

The signs have been there and although the $700 billion bailout package got approved, it has done little to help the market. The real number is not the $700 billion…it’s the $1 trillion paper loss for the market. That’s what yesterday’s loss wound up being. Add that to the $1.5 trillion from last week and you got a loss of more than 3x the bailout package. Good grief.

This whole thing is a mess and investors aren’t buying it. Countless number of people are giving up on the market and staying in cash. Everybody is looking at their retirement and 401K’s and seeing massive losses across the board. There is one thing I’d like to point out here. With 401K’s you get what you put into it. And that means managing your 401K. There are ways to protect your 401K through market meldowns. Most plans allow you to move money around on a daily basis and instead of being in the riskier funds, move your money into the “safer” funds. There aren’t many options to “short” your 401K (which sucks) but you can still protect yourself.

If you have an IRA and you manage the money yourself then learn how to short the market. Look, when people are panicking and the market is in a freefall, everybody runs for the exit. Most of the time playing the market often means going against the herd. Well, right now the herd is turning into a stampede which means we are getting close to capitulation.

We have been playing the downside for a couple of months now. In early September, I went out on a limb and played out a scenerio on how the market could act. I mentioned September and October were lousy months and looking back on things it has been the perfect storm.

From September 3:

“September is historically a “not so good” month for the market and October follows. And we all know that some of the biggest market crashes, ever, have happened in October. Anyone remember October 19, 1987, other wise known as “Black Monday”? That was the day the Dow fell over 500 points, or 22%, to finish at 1,739. A crash of that magnitude would be like a 2,500 point drop for today’s Dow. That seems a little far fetched, huh? Now, I’m not saying that the market is going to crash or that we are going much higher from here but it’s important to step back and analize things.”

From September 10th:

“The September 45 puts (QQQUS, $2.25, down $0.35) are down 13% but were profiled at $1.73) and traded at $2.60 earlier this morning. The October 45 puts (QQQVS, $2.78, down $0.19) were at $2.27 and have hit a high of $3.00. I just wanted to point this out because they have posted some decent returns. I feel comfortable holding them but selling half right now might not be a bad idea if the risks are too great for you.”

The September 45 puts have since expired but the October 45 puts (QQQVS) closed yesterday at $11! That’s nearly a 300% return in this market mayhem. And did you see how we rolled the September puts into the October put options?

I only bring these excerpts up because I want you to learn the market so so bad. Still, we have found room to play both call and put options based on the volatility we’ve been witnessing. It’s a trader’s market and that is what is making things so interesting for us right now.

In our options courses here at OptionsMentoring.com, we teach a lot of technical analysis, how to protect yourself from the market downturn and make some money at the same time. If you want to trade the S&P 500, we can show you how to do that too. Don’t panic when others are running for the hills. Do yourself a favor and learn the market. You can start by clicking here.

Okay, I’m off the soapbox now and I thought it would be a good time to mention what we do here at OptionsMentoring.com. Back to the market…

The VIX (^VIX, 52.05, up 6.91) was up another 15% yesterday and hit a high of 58. The market started to cut its losses after there was word that the Federal Reserve was going to step in but as you can see, the VIX was close to 60 like I’ve been predicting. I only repeat myself so that you’ll know what the maket is doing, how it is reacting and what you can do to prepare for these types of events. Let’s look at some more numbers.

Prior to 2003, there was the old VIX which was born in 1993 and tracks the S&P 100. That index is known as the VXO (OEX Volatility Index) and it also hit multi-year highs. That index hit a high of 66 and closed at 59.50, also a 15% jump. Now here is where it could get scary.

The old VIX hit 150 briefly during the crash of 1987. That was the bottom then and while I don’t think it can get that bad again, I’m not ruling anything out. There’s no quick fix for the market and earnings are going to have to be stellar to pull the market out of this funk. However, let’s watch for the “snap-back” rallies and if and when they do come, we will try and take advantage of them again.

Rick Rouse