The Dow had its worst day in 2009 on Wednesday and after what looked like a promising start to the New Year quickly fell apart as the index lost nearly 250 points and closed at 8200. It was an especially rough day for the financial stocks which weighed heavy on the market and more disappointing economic data put the Dow in the hole before we even opened.
I had mentioned yesterday morning that if the Dow broke 8400 we could get more downside action. The November low (7400) now comes into play but the bulls can still hang their hat on the fact that the Dow has held 8000. Obviously their confidence will be shaken if that level fails to hold. And that could be asking a lot considering we got the Apple (AAPL, $85.33, down $2.38) news after the bell.
The Nasdaq fell nearly 3.7%, or 56 points, and closed at 1489. A break below 1450 could also lead to a test of its November low of 1295. The S&P 500 fell 29 points, or 3.4% to finish at 842. If the 800 level fails to hold, we could be looking at a retest of 741. If the Dow, Nasdaq, and S&P 500 fail to hold the aforementioned levels then we could see some panic selling.
Citigroup (C, $4.53, down $1.37) looks like it has a bulls-eye on its back for the bears as the stock tanked over 20%. Citi joined its brokerage businesses with Morgan Stanley (MS, $17.19, down $1.67) and is quickly selling off assets and trying to raise cash. It now appears that their “supermarket” strategy is quickly becoming dismantled. Morgan will pay Citi somewhere in the neighborhood of $3 billion for a 51% stake in the venture, and Wall Street believes Citi will use the that money to offset losses.
Citi will report earnings on Friday and it ain’t gonna be pretty. This company is a mess and we could get some talk of restucturing plans when they report. Citi is expected to post a loss when its quarterly results are released and the stock is rapidly approaching its November low of $3.05.
I had a gut feeling on Monday when the news surfaced that Citi was selling a stake in its brokerage unit that Citi’s stock was in trouble. When a stock is at $6, most people don’t believe there is much more action from these low levels to zero compared to if a stock is at $20 or higher.
Well, throw that theory out of the window, brother. The January 5 puts (CMP, $0.67, up $0.58) were up 640% yesterday and opened at 23 cents. Of course, this trade would have been at the top of the risk scale but you get the point. The February 5 puts (CNP, $1.08, down $0.60) were up 125% and volume was off the charts as 36,000 contracts traded hands. If Citigroup does trade back down to $3 over the next month, the February 5 puts will double from current prices.
Bank of America (BAC, $10.20, down $0.45) is set to report earnings next Tuesday and there is chatter that the government is going to give them even more money. BofA is the king of banks (by assets) and has already gotten $25 billion from the government. What? They burned through that already?
Look for a pressure packed Thursday with a bias to the downside.
Rick Rouse
Rick@OptionsMentoring.com
