The market hates uncertainty and Tuesday all Wall Street could do was watch with despair as stocks were sent plunging. The market sat on the fence on Monday and traded flat and that was pretty much the deal until Treasury Secretary Timothy Geithner spoke. The more he spoke however, the more the market tumbled as he offered no real clues on what the new rescue details from the government were going to be. As a result, the Dow sank 382 points to finish at 7,888. Can’t say I’m surprised.
The market took one step forward last week and two steps back yesterday. Perhaps Wall Street was expecting too much which is usually the case and not only did the rescue plan lack firm details, not one word was uttered about housing. In fact, the biggest number I walked away with is that this mess could cost us $3 trillion.
With so much going on with the banks, everybody seems to be forgetting about Ford Motor (F, $1.82, down $0.08) and General Motors (GM, $2.70, down $0.13) and the fact that a slew of retailers are crumbling right before our eyes.
The government thinks this is all going to be fixed but it is not. The companies that are too big to fail, need to fail and the ones that survive, survive. That is why we have bankruptcy laws. My point being, why would anyone want to rush out and buy stocks?
You have heard me say this a thousand times and it’s something you should feel the same way about. Who cares where the market is going? We are not long-term investors and we realize we are in a trading market. But this is a market that can be tricky and one that can hand you your head on a platter if you aren’t careful.
The 5% rally we got at the end of last week was short-lived and the 10% pop we got in the financials were lost in a New York minute. Bank of America (BAC, $5.56, down $1.33) fell 20%, Goldman Sachs (GS, $90.40, down $7.49) and JPMorgan (JPM, $24.62, down $2.66) dropped 8%-10%. The good news is that there will be an opportunity to trade these stocks again. The market was giving so many clues yesterday that we were headed lower as excerpts from Geithner’s speech started to leak. I was going to list some put options on these same stocks but I didn’t want to confuse anyone.
The JPMorgan February 25 puts (JSANE, $1.95, up $0.95) opened at $1.05 and traded as low as 90 cents. That was a quick double if you got in-and-out yesterday. The financial stocks will continue to make 10%-20% moves in short time frames and all we are doing is playing them that way. Once we start to get some details and Wall Street believes the relief is going to help or work out, then we should see the financial stocks head back up. But you have to know which options to play.
The February options expire next Friday and they are getting a little too close to expiration to be playing with. The March options will still bring enormous profits and it is important that you pick your entry points.
For example, the Bank of America March 6 calls (BYOCF, $1.10, down $1.11) and the March 7 calls (BYOCG, $0.75, down $0.90) both lost 50% of their value.
If BofA is weaker to start Wednesday’s session, buy both of these call options 30 minutes after the open. If the calls open slightly higher, see where they are at. Set entry prices right at Tuesday’s closing prices ($1.10 and $0.75) and wait for the stock to come back to you. If the stock opens slightly higher, check the premiums for these two calls. If it is not much more than current prices, pull the trigger.
Once again, these are strictly lottery plays but there is enough movement in BofA right now that I think we will be okay.