Wednesday Wrap-Up

Another day, another 733-point drop.

As predicted in the morning post, we made a  beeline right for those 40% levels with only the Dow holding up above the line by a mere 163 points.  The S&P popped below 946 at 1:15 after making one bounce off it at 12:25.  The NYSE broke first, right near the open and led us down all day while the Nasdaq failed 1,717  at 1pm and the Russell held 514 right until the last 10 minutes of trading but then plunged to 502.

Our levels continue to be our guide and now we need to get above them or it's very likely we will have to look down at the 50% line again.  We did pick some more covered stock plays – hopefully cheaply enough as we saw stocks revisiting last week's lows but even the 20% leeway granted by the covers looks iffy the way things are collapsing.  As I said in the morning (and for a few weeks now), it is the upside plays that are speculative…  I didn't want to chase more shorts into the terrible open this morning but by 9:40 I said: "Need to hold 9,000, 6,200 on NYSE, 975 on S&P and 1,750 on the Nas to stay above the 2.5% rule, otherwise it’s 5% time again to the downside" and I'm sorry to keep repeating this stuff but it's important to see that these levels work and they are very serious guides, even in this crazy market.

We were hoping for a bounce in the morning but I warned at 10:35 that it was: "Not a real bounce until we get back over the 2.5% lines and we’re a long way off but at least some buyers woke up" and at 10:48 I said: "Going with my feelings, I think we hold it here but it’s all about the NYSE at the 6.050 line."  Well, my feelings were clearly wrong and just 9 minutes later we added the DIA Nov $94 puts at $8 and they finished the day at $11.45, going strong.  This is why balance is very important in this market – many of the stocks we picked early in the day dropped 10% by the end (ignoring covers) but, even if the bullish side made up 70% of your virtual portfolio, that would be a 7% total drop while a simple put like this one, which gained 43% in just 5 hours, would have turned 30% of your allocation into 42%.  That is the key to these mixed plays we're looking at, if you are a bull, your goal is to stay about even on the way down and if you are 70/30 bearish, if you are not making good money on these down moves, then you are way over-hedged!

At 11:34, things looked like they were holding but I warned: "Just a bounce unless the S&P gets back over 960 and that will be pathetic too but at least it’s something.  FTSE – so ugly!  Would have hit Friday’s lows but ran out of time.  Be warned guys!  This could go very bad, FTSE drifted along until about noon, then went off a cliff."  We got a very useful preview of Bernanke's speech at 12:16 from Steve Leesman at CNBC and that gave us a heads up to an ugly Beige Book at 2pm that really sealed the fate of the markets.  When Bernanke actually started speaking at 12:25 I said: "Holy cow, how many times can he say crisis in 60 seconds?!?" and that pretty much sums up that speech! 

At 1:37 I suggested going back to the well on the FXP Nov $120s at $20.20 or even the Oct $120s at $5.50 – I'm curious to see how the $120s do with so little time left but it's a given that China will react badly to a big US drop like this and those FXPs really took off in the last hour.  By 1:48 I was already back to bargain hunting mode but even that, coming down 500 points, turned out to be too early as we wound up the day around the 7.5% rule and that does not give us a whole lot of confidence for tomorrow's open.

We broke our 40% line and there's no chance of a rally until we get back over that but the expanded Big Chart shows major deterioration since last Wednesday, which is very disturbing as Wednesday was nowhere near last week's low! 

Shangahai is down 67% and still managed to drop 5% this evening?!?  WOW!   There's not much hope for our markets if none of the European bourses can make it back over 40% and the Dow is the one to watch for us as the last holdout above the line but it does look like a 50% off sale on the market is directly in our future with the SOX possibly hitting 60% off today.  As I said last week, when my visit to the Value Investing Congress turned me very bearish "Stocks have "value" as long as investors believe that the economic conditions are temporary but, especially for the non-dividend payers, they are simply not worth the paper they are written on to someone who needs to eat."