So far, so good!  Today the ‘basket’ of positions I opened on the 23rd gained another $2,500 of so of value.  As the VIX(23.65 -0.60) continues to plummet and the indexes move further into positive territory move money moves into the account.

Most of the positions are now worthless, so I’m planning to spend a little cash on commissions and then close them out. There are only about two weeks left until expiration and given this volatile market, I’m willing to spend some money to make some secured gains!

Anyhow, I’ll post updates as the positions are closed.  Trade smart!

This was a crazy week in the stock markets!  We opened the week with the world markets tanking while the U.S. markets were closed for the Martin Luther King holiday.

On Tuesday morning, Big Ben and Co. cut interest rates a record 75 basis points!  The markets opened down dramatically, then bounced back to recover most of the early morning losses. Wednesday and Thursday proved to be up days in the market and Friday again brought us back down a bit.

It has been a rough, wild ride!  Wednesday brought more than 600 points of movement on the DJI(10501.74 +3.86) – UN-FREAKING-REAL! I don’t expect this sort of action to stop anytime soon – so buckle up and enjoy it.

On Wednesday morning, I called a bottom – at least a temporary one.  I firmly believe that we will see the fed cut rates again at their meeting next week and that will continue to buoy the markets for a few more weeks.

We very well may see some additional movement down over the next quarter or so, but I’m still a firm believer that the markets will be up by the end of 2008.  The global economy has some serious issues right now, however I think we are working through them and that we will be able to come out ahead.

The credit markets are beginning to show some easing, and the government is getting ready to throw money into the hands of the public.  While I think the stimulus package, as it stands now, misses the mark – it will help somewhat.

In my opinion, it is a great time to buy! Financial stocks are very attractively priced, and with the recent crash in the NASDAQ(2264.85 +0.29) techs are looking good as well.  This year should prove to be a great one for MSFT(26.32 +0.36) and other tech companies.  We’ll see how it all goes!

Well, good luck!  Make sure all of your analysis is solid before putting on trades in this marketplace.  Vast sums of money can be won, and lost, in a very short time with these big market moves.  Trade smart!

Whatever…

Yes, today was a rough, rough day in the markets. No question about it. I’ve got a couple of things to talk about, so lets start with my current position on the Russell 2000- RUT(652.73 +1.97) – and why I’m not worried yet.

The economy is getting softer, that is a fact. The Russell 2000 is a bunch of small companies that are not nearly as globally connected as the big boys in the S&OP 500 or the Dow. When things get soft, the RUT tends to take it in the chin.

If you watch the charts of the SPX, DJI and RUT together you can see that the Russell typically moves a lot faster than the Dow or the S&OP 500 (see above). Over the past couple of months as volatility has jumped, you can also see that the RUT has moved even faster.

So, this morning we get a weak job number and the recession talkers are all ears. The market begins to drop and the RUT really takes it on the chin: recession = weakness in small companies. So, if the recession talks are in the wind, I’d expect the RUT to drop. This is why I’m not worried yet…

Today, the RSI on the RUT hit 23, anything below 30 is typically a signal of an oversold situation. 23 is really a sign that we should get a slight bounce next week. On Thursday the indicator was at 32, quickly working its way down – this drop was big… Watching the normal pattern of the RUT, I completely expect this bounce.

Anyhow, back to the trade. The RUT trade is at 670, about 50 points away from our current point in time. That is another 7% drop or so, I just don’t see it happening – at least not in the next 2 weeks!

So, since I’m still optimistic on my trades, lets talk about my optimism on the economy and why I think it is still good.

First off, the bad…

• Demand is down – homes are declining in value
• Job growth at 1% or less each year
• Interest rates are dropping rapidly

Now lets get to the good…

• After inflation, after tax income is up 2%
• August initial jobs were at -4K, revised +93K
  • This number gets revised every time
  • I’d expect that our current jobs number will come up quite a bit
• The vast majority of the reported job loss is in construction
  • DUH - housing is taking it on the chin, of course construction jobs are down.
• Q4 GDP likely to be 2.5->3% growth
• 5% unemployment rate – not to shabby

So, looking at all of this stuff what is going on? Well, the consumer is a little tight due to the housing market, and the economy is a little soft due to the gasoline(housing) being taken off of the fire. As a result of the softening housing market, a lot of construction workers are looking for jobs and the financial firms are having to write off sub-prime losses. However, the rest of the economy is in pretty good shape…

As the fed works this all out, it is in a really tough spot. Gold and oil are up, along with a bunch of other inflationary pressures. Ben and Co. need to make sure they get this right, the real risk here is … stagflation. Ouch.

If your not familiar with stagflation, basically it is low to no growth with rising inflation – bad news. Here is why this is a catch 22, taken from the wikipedia article on stagflation:

An important monetary mechanism to increase economic growth is by lowering interest rates, which reduces the cost for consumers to buy products on credit and businesses to borrow to expand production. While this can increase economic activity, it can also result in increased inflation. The monetary mechanism to reduce inflation is by raising interest rates, which increases the cost for consumers to buy products on credit and businesses to borrow to expand production. While this can reduce inflation, it can also result in decreased economic activity.

So, lets just hope we don’t end up with this mess.

A key to avoiding this is a strong dollar policy. The problem with that is of course, as interest rates go lower, so does the dollar. As interest rates go up, economic activity slows and the dollar becomes stronger. So, if the fed needs to turbo charge the economy, it needs to drop rates – but by doing so may accelerate inflation to a point of big troubles.

Personally, I agree with former federal reserve bank governor Wayne Angell. The federal reserve and the government need to team up and put together a policy that will lead to a stronger dollar. In my opinion the best way to do this is to lower corporate taxes while dropping interest rates. This gives us the chance to fix the credit crisis while bringing up the dollar by bringing more business to the United States.

I don’t see any other way around it. If President Bush can step up to the plate and put a solid corporate tax policy reform in place, we can pull out of this without any major issues. It would be one of the greatest soft landings in history. Something to applaud.

I don’t think it will actually happen, but I can hope right? I’m sure the folks in the federal reserve and the treasury department are talking about it. I’m confident that they can figure it out.

Stay tuned, it’s going to be a fun ride! Oh yeah, grab my feed!

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!