Well that was lack-luster. The DJI gave up over 220 points, the SPX dropped over 21, the RUT was down 12.48 and the NASDAQ gave away 42.65…

2007 ended with a bit of a flop and 2008 has started out the same way. It’s a little bit of a strange situation, oil hit $100 dollars today, gold is rocketing along with most other commodities, and the fed fund futures are pointing to a 20+% change of a 50 basis point at the end of January.

It’s a little bit of a cat and mouse deal here. The ISM numbers today point to weakness in the economy, however non-residential housing is up nicely. Overall, the economy is still growing, but the adjusted money supply is shrinking. Credit is tight, the fed is still dropping rates but the yield spread is still inverted. It’s just all upside down!

Here is an interesting quote from the FOMC minutes today:

Some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit; such an adverse development could require a substantial further easing of policy.

Just a few days ago I was saying that I think we will be cutting rates, a lot in the future. This statement from the fed seems to back that position. The real tricky thing here is that as rates get cut, the dollar is likely to continue to weaken. As the dollar weakens gold, oil and other dollar based commodities will rocket up in price. As oil goes up in price, so should inflation… It’s really a vicious cycle.

So what does all this mean to the options portfolio here at ryanbarr.com? Well, I wish I would have sold a bunch of bear call verticals about a week ago! I don’t think the January RUT position has any problems. The position is very well protected and has a solid 80 point or so cushion. 730 still remains a serious point of resistance and I think it could be tested shortly. We’ll see how it all comes together over the next few weeks.

Here is a one year chart for the RUT, take a look at the purple line and how the index tends to bounce right off of it.

The blue and purple bands are standard of deviation channels, purple is two std’s away and the blue is three away.

After you take a few minutes to look it over, you should see why I’m not too worried about things! Anyhow, if the bottom completely falls out and the Russell tanks 80 points in the next few weeks, then I’ll run to the hills and be quite upset that I didn’t exit last week. There is roughly a 3.7% chance that will happen - not to likely.

Good luck - trade smart!

Categories: Investing, Papermoney