Monday Market Madness

What a crazy day!

After falling over 800 points, the Dow and the other indexes turned on a dime at 2:45 and flew up nearly 5% before pulling back a bit into the close.  It seems the move was primarily based on speculation that there would be a globally coordinated rate cut, which has not yet come to pass.  We got bad news from BAC after the bell so we’ll have to see what happens in the morning but at least my morning plan to cash out the shorts into the dip and wait for a bounce to re-enter worked out pretty well. 

Right after I warned RMM to protect the gains on SKF at 2:31, the market took another leg down and, in the next 10 minutes, it was all I could do to just run down a list of stocks I thought were ridiculously cheap.  The list was: "BA $48!!!  It’s the end of the world as we know it…  TM $71, HPQ under $40, BTU $31, HOV under $6, LVS below $19, ISRG $191, MDT $46, SNE $25, TIE $7.37, SKS $7, SU $26…  GLW $12.50, NYX $30, CAKE $11.50, CAT $46, EBAY  $16.81, UTX $50, INTC $16.28…  These are amazing but how can you buy anything with the market like this."

The second half of that list was posted literally 3 minutes before the market took off.  Sometimes, when things look ridiculously cheap – they ARE ridiculously cheap!  A lot of members took advantage of selling puts into the downturn and that is absolutely the best way to bottom fish as you are taking stocks that are trading down 40% off their highs and giving yourself an additional 20% discount should the stock be put to you is always a good way to make an initial entry. 

We did not get the NYSE back to 6,800, which would have given us a more bullish outlook for tomorrow’s open but it’s all about the Fed now.  Not that a cut will be a long-term solution but at least it should be a rally we can sell calls into and pick up some more puts at a discount.  We need to keep an eye on the above list of stocks to see if any of them break below today’s bottoms, if we start seeing that, then another major leg down becomes likely.  I’ve made a new Big Chart to show where our danger zones are:

These are some very scary global numbers, especially as Asia is still trending down, perhaps fortelling the fate of Western equities.  The NYSE did, in fact, come dangerously close to the 40% line today when it bottomed out at 6,440 and the SOX certainly bear watching as they are, by far, the poorest performing US index.  So if the SOX can’t find buyers at 50% off and the Transports begin heading down to match (despite falling oil prices), then there is little hope for the broader market.

The transports actually recovered 100 points off their low yesterday, so they could have been 45% down and the CAC is teetering at the 40% line.  These are 1-year market losses folks, not good at all and no one is speaking about it yet but what about all those baby boomers who are just about to retire?  We thought this was going to be a problem 2 years ago, when they had 30% more money in their IRAs and homes that were worth 25% more – what’s the status now?  This is how a Wall Street crisis quickly becomes a Main Street problem. 

Gold was my top pick in "Option Plays That Are Better Than Cash" last Thursday and ABX is still very cheap at $30 ahead of possible global rate cuts, which will devalue all currencies.  The Jan $30s at $7.15 were my first pick of the morning yesterday and they fell all the way to $5 on the dip and can now be rolled down to the $25s for $2.70 more.  Another good play on ABX is selling the Jan $25 puts for $2.38, which puts you in the stock at $22.62, very near its 2005 lows, when gold was $450 an ounce.  We like ABX and FCX because energy costs are falling faster than gold and, in FCX’s case, copper is already back near $200, which should begin to provide some support.  Keep in mind that the ABX play is disaster protection only, in case our currency starts collapsing as the Fed dumps Trillions on the market fire while the GLD play was more of an all-purpose money-maker with an upside in a global collapse.  Platinum seems oversold too but I don’t know any good plays there…

One question both I and Barry Ritholtz had today was: "How much influence does Jim Cramer have?"  Our man Jim is well known for stampeding his sheep in and out of stocks but yesterday he made a huge call on the today show. In what Ann Curry called a “dramatic statement,” Cramer emphatically urged any investor who has money they may need in the next five years tied to stocks to pull their dough out.  “I thought about this all weekend,” Cramer told Curry. “I do not want to say these things on TV." (HE SAID ON TV’s #1 MORNING SHOW!) “Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.  I don’t care where stocks have been, I care where they’re going, and I don’t want people to get hurt in the market,” Cramer told Curry. “I’m worried about unemployment, I’m worried about purchases that you may need. I can’t have you at risk in the stock market.”

Usually I would just look to do the opposite of what Cramer says but this is one incredibly scary market and a guy like Jim telling people to take 5 years’ worth of their income out of the market because it’s going to drop 20% can become a self-fulfilling prophesy very quickly (and almost did in yesterday’s action alone).  Note in the video Cramer is using my 2005-level target for how far stocks should fall but he neglects to mention there are already plenty of stocks that are oversold on that basis (see again above list).