Friday, July 28 Market Assessment

It' Not Over, Yet!

Talk about brutal. Yesterday's market plunge was dizzying; at one point the DOW was down 440 points. When the smoke cleared, the markets had their biggest one-day drop in years, and the volume levels were the second highest in history! If trading curbs had not been put in, the market would have exceeded 3 billion shares! But, this downturn was expected, and I had covered myself with a number of put positions that made the day one of my most profitable this year. Ironically, I was most gratified when Cummins (CMI) rewarded my patience and bumped up 6+ points on blow-out earnings. It was my one long call position, and I went from being down $1600 to being up $400.

Now, what to do next?

It's clear that the financials are in the most trouble. Whether we have a bounce today or not, I plan to load up on puts on a number of big names, like Fannie Mae, Wells Fargo and Capitol One. The sub-prime contagion is spreading, and this is looking more and more like the savings and loan debacle of the mid-80s.

I am bearish on energy stocks, too. Especially the oils. I think we have seen the peak this year. With OPEC meeting soon, and their greediness very much in evidence, I expect the spigot to open up even more during the rest of the year. It's a rash thing to do, but I will predict oil at $60-$62 a barrel before February! The results from XOM and BHI (both of which were big misses) should tell us that the OIX and OIH party is over. Time to go short here, as well.

Another big step down is looming in the general market, also, but it may not happen as dramatically as it did yesterday. The S&P 500 should retreat another 100 points (it was down only 35 yesterday) to its strong support level at 1380. But it will take a while to get there. The DOW could go as low as 12650, which would complete a 9.5% retracement from its 14000 point, all-time high. However, that represents another 800+ points down, my friends. It's not safe out there.

I will shop very carefully over the next few weeks, but mostly I'll be shopping for puts.

Summary: Short-term very bearish; long-term mildly bullish