What a long strange trip it has been. Well, we are Grateful and the market has been left for Dead. Thursday’s market action could certainly be summed up by one of the most famous lines in music history and today’s “songs” from the stock market will be enjoyed for many years to come that’s for sure.
Although there are numerous topics to discuss and never enough time, I’ll try and be brief about the market. To start, you have to realize that the current market environment is the quickest downturn, correction, or oversold market that we may ever see. Ever. If you have followed the market closely then you may be one of the lucky ones making money because this market has become easily predictable.
The drop in America’s 401k plans, pensions, and other investments have caused a wave of cascade selling that is hitting the market like a cannon ball going through a wet napkin. There is no support and there is no buying. There are no leaders. Everybody is selling.
That scares everybody and the natural reaction is to “save what you have left”. This sort of reaction or over-reaction has provided us many opportunities to buy puts on stocks that are sinking. As option traders, you buy call options in a bull market and puts in a bear market. And because you always have both bull and bear markets, it is the main reason why I don’t own a single share of stock.
With options you control more shares with less money and the returns are 10x more powerful. Once you discover these secrets then you will understand why I love both bull and bear markets. I really don’t care. “The trend is your friend” has been providing us with triple-digit profits for quite some time now.
The point I’m trying to make is now that we have tested the market lows and broken through those levels, it is going to get a little tougher to predict what is going to happen…to a degree. I still think we go below 7,000 if the auto companies fail but something dramatic is about to happen. That I can feel.
Yes, it has been “dramatic” for many people because they feel as though their life savings are going up in smoke. However, they could have protected their 401k’s and pensions by buying put options as insurance to protect the stocks in their portfolios. That’s another subject but the point I’m trying to make is that you really need to learn how the market works and more importantly how option trading works. We offer some kick-butt courses that will make you money but you have to educate yourself.
On that note, I’ll get back to the market. The Dow fell 449 to close at 7,552 while the S&P dropped 54 to finish at 752. The Nasdaq tanked 70 points and is now at 1,316. Add that to Wednesday’s decline and you have the worst two days in the market since 1987. I predicted 7,500 for the Dow in yesterday’s morning blog and we got down to 7,506.
I swear I don’t have a crystal ball but I’m taking the clues the market is giving me and I’m just trading the trend. When the trend changes you will have losing trades but more often than not you can limit those losses. As we change over, you simply look for the next stocks that are to move the “new” trend.
If I’ve said it once, I’ll say it again anyway. The market never dances with the same partner twice. I have no idea where the market will close today but the futures are pointing to a higher opening. Today is option expiration day so we will have a crazy open and a crazy close.
Rick Rouse
Rick@OptionsMentoring.com
