David Lentz

Options Trader: Wednesday Outlook

Al -- "Do what works until it doesn't "

Excellent advice. I submit that when nothing works, the bottom will have been achieved.

Options Trader: Wednesday Outlook

Maybe oil prices coming down will boost things, but I tend to think that oil prices are coming down in large part because the demand is crumbling along with the economy. That, and the futures scam is getting a few beams of light thrown at it (it IS an election year), and the perps are probably taking the money and running.

Housing is not "old news", but rather "continuing news", and until we see if the much-ballyhoo'd bailout bill actually does prevent further foreclosures, and until we see some glimmer of a sign that the ginormous overhang of unsold houses is beginning to decline (instead of continuing to rise as it is), housing will continue to eviscerate the financials. I simply don't see any way that the rest of the economy can flourish without a financial industry to fund it.

As for the dot-com chart, when I look at the NASDAQ chart over the past decade, I see it peaking at a snerd above 5000 late in the first quarter 2000, and bottoming out around somewhere around 1200 early in the forth quarter of CY 2002. Yes, there was a rally (dead cat bounce?) in mid-2000, but the overall course of the decline seems pretty clear to me, a 75% fall from the peaks.

Now for sure, the NASDAQ was the worst hit in that situation -- the NASDAQ was all about dot-com back then. The Dow did not get overheated and did not rise nearly so high nor fall nearly so far. But looking at the chart for the DJIA, it also peaked early in 2000, and bottomed late in 2002, at a bit over 7000 (let's say 7300, it's not worth being precise about it). That's about a 4400-point drop from top to bottom, or 37.6%

So far the current market declines look like 22% for the Dow and 22% for the NASDAQ.

While there is quite a bit of difference between 37% and 75%, I submit that these differences are due to the differences with how these indices are aligned to the elements of the economy that drove that particular boom. Our current boom seems much more closely aligned to the Dow (financials) than the NASDAQ, so I would expect to see the Down decline by something closer to 75% than 37% this time around. That's why I think we have a ways to go. I expect that the NASDAQ will ultimately drop at least 30% in the current decline, after this Christmas season when spending dries up for consumer electronics (no money, no credit = less spending).

We have yet to see the debt that was pushed up into credit cards implode, but that's probably coming. And doubtless Uncle Ben will bail out the credit card companies, leaving the credit card holders severely wounded, in a repeat of the housing debacle, a refrain with a different verse.

So who drives a consumption-driven economy when the consumers have had their homes repossessed and credit cards cancelled? And what does it take to make the consumers well again? I doubt that any number of tax refunds will do the trick. It's going to take time to heal these wounds. Years, not months.

The next quarter's earnings will tell the story, resolving these minor quibbles I have about whether the worst is behind us.

I am confident that your strategy of hedged trades will serve you well, whether the bottom lies behind us or ahead of us. Best of luck.

Options Trader: Wednesday Outlook

Phil, much as I appreciate your longing and expectation for a run back up to the highs ... can you honestly see this happening with housing continuing to head lower, with the financial industry completely and utterly dependent upon handouts from the Fed (and ultimately you and me)?

And where was the fear-drenched sell-off? Have the circuit breakers in the markets tripped even once?

Seems like the (so far) quite mild decline can only be a step lower, as continued housing declines, a year's inventory of unsold homes weighing on the markets, and a likely doubling of the national debt (with the attendant dollar destruction) are going to act as pretty weight albatrosses hanging around our necks.

If we look back at historical declines, the dot-com collapse was far more severe, despite the premise for it being far milder than our current straits.

Perhaps you mean that we should expect a spirited rise, possibly approaching the previous highs, but only in preparation to dash investors on the rocks below with even steeper plunges to greater depths.

Is that kinda what you mean to say, with all this happy-talk? Or is this all merely a difference in time horizons, with you, the day-trading options whiz, looking no further ahead than a week at most, and me with a bit longer time horizon?