The market got off to a good start on Friday after a strong fourth-quarter gross domestic product (GDP) report showed a nearly 6% expansion in the U.S. economy. It marked the fastest rate of growth since the end of 2003 and the bulls loved it. The Dow raced out to an early triple-digit gain and reached a high of 10,272 but that energy faded once again as the index finished the day with 53 point loss and left the Dow at 10,067.
The S&P 500 fell 10 points and settled at 1,073 while the Nasdaq continued to lead the way with heavier losses, falling 1.5%, or 31 points to close at 2,147. The signs have been there, folks, and the weakness is no surprise. All three indexes are trending below their moving averages and it remains to be seen if the bulls buy this dip or finally take a break from the run they started last March.
For the month the Dow was down 3% and after hitting a high of 10,767 on January 14th, it gave back 700 points in two weeks. For the record, we said the Dow had a chance of reaching 10,800 back in August before we faded or headed higher…
The S&P 500 finished January with a loss of 2.7% while the Nasdaq tanked 3.9%. In August, we set our targets at 1,175 for the S&P 500 and for the Nasdaq we had set a year-end 2009 target of 2,275 for the index which was busted by Christmas.
We thought if 4Q earnings came in solid there would be a chance the market sets new highs. Earnings have been more than solid…they have been stellar. The problem is the rhetoric coming out of Washington. The CBOE Volatility Index (VIX, 24.63, up 0.89) is telling us the market will continue to be volatile and as options traders it means it is one of the best times for trading.
We have been preparing you for a market decline and the “pullback” could turn out to be a decent “correction” if the Dow falls below 10,000. We didn’t want to use the word “major” when we mentioned correction although a 10% correction is a major deal. The thing is we have already had a 5% decline and the rest of America won’t even notice the other 5% unless the Dow drops below 10,000.
Last weekend, we sent out the portfolio update and even included a “free” option pick for those of you who read between the lines. Here is what we said:
“A lot of investors get nervous when the markets tanks or starts to correct but we love it. We’re like a chameleon, we change colors. Folks, if the market is in correction mode then you can make just as much money on the downside as you can on the way up. We still expect some kind of bounce but that may not come until the bears are done pushing.
For instance, we talked about the weakness in Goldman Sachs (GS, $154.12, down $6.75) on Thursday and Friday it dropped another $3 from our 1pm update. Some options traders did well buying Goldman put options. The February 150 puts (GPYNJ, $4.59, up $2.44) jumped over 110% on Friday.
We show you this stuff because you can make just as much with put options as you can call options. So, if the market is going to tank, don’t be nervous. The opportunity the volatility is providing right now is incredible.” (END)
Goldman Sachs dropped 3% on Friday and closed at $148.72. The February 150 puts are at $5.85, or 25% higher than a week ago. Of course, the options traded lower throughout the week before making a huge jump on Friday again but the trend in Goldman has been lower and we wanted to prove to you that money can be made in volatile markets.
Goldman Sachs will continue to be bumpy and we aren’t sure if there is continued weakness in the shares or if they rally back. The company was humbled along with the rest of Wall Street in 2008 when the financial markets crashed and with the help of Washington, turned itself into a commercial bank holding company in September 2008.
This could all change again as Goldman will probably relinquish its “bank” title and go back to a private equity firm. Since they have paid back the TARP, we think it would be a wise move so that they can get away from the restrictions of “Obamanomics” and can go back to doing what it does best and that is making money in the equity markets.
Given the current market conditions, we think it’s still best to keep a mixture of both call and put options in your portfolio but we are leaning more towards put options over the near-term.
We wanted to get the Weekly Wrap out a little early today because we know many of you are nervous and may not know how to play a bear market or a volatile one. We are working on the current trade updates and we really like the opportunities we are seeing in certain stocks. In fact, we think one of the BIGGEST trades of the year is setting up right in front of our eyes.
Folks, it’s rare we get this excited about a trade but we are looking at options that could turn $500 in $25,000 by the end June or $1,000 into $25,000 by September. If you don’t have that much then $50 or $100 could turn into $2,500.
As you know, option trading is risky but we will show you a trade on Monday that has the potential for these kinds of returns. We will show you the options and do the math for you to prove that the potential is there. Of course, the risk is that the stock doesn’t do what we want it to but we think the rewards will far outweigh the risks.
We will back in the morning with the updates and we are also working hard to get the updated option symbol terminology posted tonight in the Members Area.