Panic Selling in Stocks Has Ebbed, But Still Bearish

By Ben Kim

The economic crisis of 2008 is on the forefront of everyone’s mind and has affected CEOs and blue-collar workers alike. The stock indexes have been incredibly volatile as a result and the market remains bearish from both a fundamental and technical perspective.

The S&P 500 index saw a high in January 2008 above 1460, and this past month we saw a low for the year under 820, representing a 44 percent drop. While I do believe most of the panic selling is done (unless we get severely unfavorable fundamental news) the volatility and downward trend is likely to continue.

As example of the extreme moves we’ve seen, in just one day on November 13, 2008, December S&P futures saw a low of 817.50, and peaked at 914–that’s major volatility. Technically, you could say the market saw a key reversal that day, posing lower lows from the prior day and a higher high and close. However, I think we are still in a strong bear market right now and rallies haven’t held.

Looking at a chart of the S&P 500 futures, you can see how sharp the declines have been. December S&P futures have crossed the 200-day moving average, a major support area, and have traded below it. It’s a big proving ground that indicates to me that the market is headed even lower.

Fundamentally, there is plenty of bad news to go around. On November 7, we saw the unemployment rate hit to 6.5 percent, a 14-year high. Retail sales fell 2.8 percent in October, the most since 1992. Citigroup just announced 50,000 planned layoffs, and the auto industry is on the verge of collapse. This type of news signals how deep our recession is, and one could only expect the unemployment rate would head higher.

I could go on and on about how bad the economy has been, but will focus on how you as a trader can take advantage of market moves.

I am predicting a further drop in the S&P, Nasdaq and Dow Jones Industrial Average, but I think it will be less volatile than we’ve seen in the past couple months, and more of a steady downward trend than a drastic move. There are many different trading approaches, but what you’d want to do in any bear market is sell rallies. Relief rallies really haven’t help up.

I advise trading options because when you trade futures, you get whipsawed because of the high volatility, and if you don’t have a large amount of capital backing your trade, you can get stopped out. I would recommend E-mini S&P options, which trade electronically. I see potential for a corrective bounce to 920 or 950, near the 21-day moving average, then I would consider buying December put options for another move lower. I don’t think the S&P 500 will see 1,000 anytime soon. Keep in mind that option premiums typically increase significantly when volatility is high; also, the farther you go out in option expiration, the more you are likely to pay. So I recommend December 825 put options, which have been trading around $2,200 but should come down a bit if the market rallies. But please call me if you are interested in this type of trade to get a more current price quote.

Crude Oil

Crude oil is likewise looking bearish. Obviously consumers are happy to pay less money at the gas pump, but this is due to a global recession, which is not so good. We are seeing a recession across the world, leading to less demand for energy. When crude oil was trading near $150 in July, it was the case that stocks would drop when crude oil was up. But more recently, they have been moving in tandem–when the stock market falls, it’s seen as a sign the economy is in bad shape, and demand is likely to soften further. So that leads me to think selling rallies in crude oil is also a good trade to pursue. I would establish a bearish position on a corrective move up to 63.90 to 64 a barrel in the December contract.

Overall, I’m still very bearish in all these markets although sooner or later, we will come out of this recession. The whole trick is in the timing; knowing when to put your position on, and when to get out. Go with the trend.

Ben Kim is Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. He can be reached at 800-355-5757 or via email at bkim@lind-waldock.com. Lind-Waldock hosts live webinars each week featuring market outlooks from our Lind Plus Market Strategists, as well as a variety of other webinars on specialized topics of interest to traders. View our calendar and sign up at no charge at www.Lind-Waldock.com/events.

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