How Low Can You Go? This is one of the tag sentence of the most well known cigarette brand in Indonesia “Sampoerna Light” which was acquired by Altria Group/Phillip Morris (MO) a couple years ago. The questions of “How Low Can You Go” has the perception of how low the Tar and Nicotine content comparing to other rival cigarette products.
This tag reminds me to the current market condition. On the S&P daily chart, we can see that stocks were trading on the “Trading Range” , started with the high of 157.52. This is like a neutral zone in the ongoing battle between buyers and sellers. If the trading range is in uptrend, the buying army is obviously stronger than the selling side and rising prices result. The trading range that we have since mid of October 2007 is a downtrend, the flip side of the coin and the selling side is much more powerful than the buyers. So, there a couple of higher-lows and lower lows that make “BEARISH” message on the technical side.
There was a break-out on the 138, and a support level on the 137 the lowest level in August 2007, but once again, Sellers were dominance on the process and stocks were just falling down like a knife without any stops. 30 MA confirmed the downtrend since the beginning of November 2007. This is very ugly scenario and there were a lot of damage happen. The good news of IBM and GE Earnings that exceed analyst expectation just made small rallies, but the bad news on the whole recession possibility really caught investors tightly.
Investors need more assurance from Fed and US Government on real Solutions. It must be fast and comprehensive, otherwise the situations are getting worse. The Bush administration propose “Financial Stimulus” yesterday and some of key actions are:
- Tax incentives to Businesses
- Financial Stimulus of 1% of the GNP, or approximately $ 145 billion.
On the upcoming Fed’s meeting on 29-30 Jan 2008, interest will be cut by 0.5 basis point. I do not know whether this will be helping on the overall economic situation, but, the previous 0.25% reduction has not made the market move and the decision was below market expectations (see my writing on “Market Bullied Bernanke”). With the existing increasing of inflation threats, the Fed must be very careful on every steps that they made.
The down rally was getting worst by the options expiration week. Options buyers usually sell their ITM positions in order not to be assigned and market maker has to buy it. To hedge this position, market maker will sell shares and weighing additional pressures in the market.
I still do not see the “Bottom” yet despite market has been dropped so much. All of technical indicators are still showing downtrend. However, I believe there are quite a number bargain hunters are waiting for short rally, especially after Fed Meeting and Financial Stimulus.
To buy Call Options making a bet on good stocks that have been on their lows can be rewarding, just make sure the tenor is about 3 months to ensure the right movement. However, you must consider that you may pay premium price due to high volatility. Selling Put Credit Spread with far OTM strike price on good stocks that has found firm support is one of my favorite strategy. Just imagine, that market players need insurance and you sell the insurance to them with high price. However, this will be a good move if you choose good risk on good stock that quite robust with Bearish situation. There is always opportunity in a bad market condition and this is how you you look at it…….
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