Monday Melt-Down

What a rotten day that was!

We only made a couple of plays today as we stood back and watched the carnage.  At 9:27 I targeted FRE in the DTP at $2.60 and we hit it right on the nose at the open, with PSW members setting a bottom in the morning dip.  FRE shot up all the way to $3.50 (up 34%) but we got nervous and bailed at $3.05 with a still respectable 17% gain.  That gain in FRE sent our Stocks Virtual Portfolio roaring back as our double down paid off and we are left with our very nice, original spread.

At 10:54 I reminded members we were protecting our long positions with the DIA Oct $117 and $116 puts as the market was failing our levels, that was very timely as they gained 25% and 18% respectively just an hour later and up 30% and 50% since we first added them as covers.  Having index puts allowed us to ride out today’s dip without feeling the pressure to slap covers on as the stocks hit what we hope are the lows for the week. 

We grabbed more WM at $3.65 for the Stocks Virtual Portfolio, replacing our successful FRE and FNM gambles but, other than rolling GOOG down to the $490 calls, we had little appetite for taking on more risk as the markets were just simply depressing in their relentless decline.  I noted it was interesting to go back and look over this same week last year as the similarities are striking: "I’m just rereading last year’s week before labor day, we had a bad Monday and then a huge Tuesday sell-off and then the GDP saved us into the holiday (but the week after sucked and THEN we had a 1,000-point rally).  We were at Dow 13,600 at the time, NYSE 9,800, RUT 800, SOX 500 and S&P 1,480.  I was very down on the financials that Tuesday, saying there were many more losses to come than they let on!  Great take on that week’s Fed minutes if I do say so myself.  It was a huge manipulated week starring – the Financials!"

Speaking of manipulation, Cramer went on the attack again, demanding that FRE and FNM be taken over immediately despite the fact that both companies deny that they need assistance.  This does not matter according to Cramer as his pals at GS have already bought up all their debt at a discount and now demand a government backed bailout that screws the shareholders and makes them Billions at the taxpayers expense.  Cramer was on TV last week insinuating something terrible was going on with FRE and FNM and suggesting the SEC should stop the stock from trading.  Seven days later, there was no terrible news and there was nothing that should have caused trading to stop so Cramer has moved on and started calling for a shutdown of the companies he couldn’t bankrupt by panicking investors.   

Now Cramer is threatening financial armageddon if his demands aren’t met.  He told fellow GS alumni Paulson to "take over Fannie and Freddie" and, amazingly, our Republican pals agree that the best thing to do is suddenly to let the government take over a $5Tn business.  I actually sat through Kudlow today trying to figure out the justification for this one but it seems big government is just the ticket as long as you are using their cash to backstop the risky debt you took on before engineering a crisis to force the bailout – just another example of your tax dollars at work for Goldman Sachs.

All in all, it was a rotten day but the volume was low, oil stayed down and that sector crashed as well with XOM and CVX leading the damage in the Dow AND the S&P.  That makes up one half of a rotation play – now we just need something else to perk up so we have something to play with.  The VIX perked right up to 21, a level it hit on Aug 13th and 20th, both days followed by bounces but 22 has been the reliable top of the range since Aug 5th, when the VIX fell from 23 back to 20 and gave us a 350-point gain, starting our best week of the month so we’ll be watching that very closely tomorrow.

We’ll also be watching our Big Chart levels and hopefully we won’t need the bottoms:

We lost the 50 dma on the Dow, fell into 20% horror levels on the transports (despite oil’s decline), dropped 2 greens on the S&P, added a red to they NYSE and the Nasdaq but the 50 dma fell so far down that the SOX is now touching it and the Russell fell 34 points but is still hanging onto market leadership.

Asia is the same disaster it was last week and there were no changes in Europe so this failure is all on us as our markets again lost ground to the rest of the world, as I mentioned in the morning post.  We’ll have to keep a close eye on the 20% line for the Dow and the S&P and, as for the others – there’s a reason we called that 25% line "terror" as that was the line Asia crossed on the way to 50% losses – we don’t even want to go there!