Banking Fears Are Weighing On The Market – Keep Your Powder Dry!

January 16, 2009
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market continued its slide early in the day, but it reversed nicely in the afternoon. Over the last two months, this support level has held and we've seen volatile trading between SPY 85 and SPY 92. From a higher open, the market has been gradually slipping throughout the day. News from the financial sector is dire. Citigroup lost $8.3 billion last quarter and they are splitting the company in two. Over the past 15 months, the company has lost a mind-boggling $92 billion. Bank Of America received $20 billion from the government so that it can shoulder a $15 billion loss from Merrill Lynch last quarter. Bank of America is also choking on Its Countrywide Financial takeover. In Europe, the banking news is not much better. Barclays fell 25% in late trading Friday and the bank did not comment. It's rumored that HSBC needs $30 billion of new capital and we know that Deutsche Bank will take a $6 billion loss this quarter. This morning, Wisconsin's governor explained that the state will run at a $5.5 billion deficit over the next 2 1/2 years. The unemployment rate in that state is 5.3%. He considers his condition dire, but better than many other states. Illinois is currently running a $4 billion deficit and California has an $8 billion deficit. Michigan, Indiana, and Ohio are in worse shape than Wisconsin. You don’t hear much about the massive bailout needed at the state level. According to the Constitution, states can’t run in the red. Congress has approved an $835 billion stimulus package and it includes tax rebates, payroll tax credits for businesses and an infrastructure build out. The U.S. Treasury will have to issue $2 trillion worth of bonds to finance the bailouts and stimulus packages in 2009. A five-year chart of the market shows a steady deterioration. The support level at SPY 85 is barely noticeable and today we might challenge yesterday's lows at SPY 82. REITs, retail and the auto industry all smell of bailouts or failures. The panic from October and November has returned. Next week, we will hear from many insurance companies and regional banks. I am not expecting as much bloodshed from these companies and the financial sector might find support. Selling out of the money puts is the best current strategy; however, you have to wait for signs of market support. I've been telling you to buy back put positions on a breach of SPY 90 and you should be in cash. The reversal today and the downside momentum are a sign of continued selling this afternoon. However, it is option expiration and anything can happen. Keep your powder dry. image

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