Urgent Note: Global Free-Fall

Global Markets Crushed

Dear Bottarelli Research Member,

Although the U.S. markets are closed today in honor of Martin Luther King, the beginning of trading on Tuesday looks to be very concerning.

That’s why I’m sending you this special alert today.

You see, as I write this alert, some of the major International indices in both the European and Asian stock markets are getting crushed. China’s Shanghai index is down over 5%. India’s benchmark index dropped 7.4%. Hong Kong’s Hang Seng plummeted 5.5%, which is the biggest percentage drop since the September 11^th terror attacks.

Japan’s Nikkei 225 dropped 3.9%, which is its lowest close in over 2 years. Germany’s DAX was dropped 4.2%. France’s CAC 40 dropped 4.7%. Britain’s FTSE 100 dropped 3.6%. The list goes on and on.

As a reaction to this global free fall, the U.S. futures are deep on the red. The Dow futures, for example, are down over 350 points. The S&P 500 futures fell 55 points and the NASDAQ 100 futures lost 72.25 points.

These major losses will undoubtedly make January 2008 as one of the worst ways to begin a new trading year in history. In fact, the Dow has fallen 10% in four weeks, and it’s now off 15% from its October 2007 high point. This represents the Dow’s worst ever start to a new year.

The S&P 500 has also pulled back 15% from its October 9^th high, putting the index at a 16-month low. The NASDAQ is also off 18% from its October high and the Russell 2000 is down 21% from its July 13^th high.

Make No Mistake: This is brutal selling pressure, and it markets a very significant moment for the major market averages. After all, in times like this, it’s important that we get a handle on the severity of the possible downside by studying the history of past recessions. For example, a study of the S&P 500 over the past nine recessions shows that the index lose 25.6% of its value (measured from peak to trough).

Using the S&P 500’s October peak at 1525 and accounting for the current S&P 500 futures (which are down 55 points), this would take the index down to 1270, which is a total loss of 20%. Therefore, you could make the case that we’re within 5% of a bottom. And once again, we’ll ignore the debate about whether or not we’re even in a recession. Does it really even matter at this point?

Another Important Consideration: Using the CBOE Volatility Index (VIX) as a trading metric, you’ll see that the “fear gauge” traded above 30 in August and again in November — and in both cases this level signaled the end of the intense selling pressure. As you can see, we’re approaching this critical 30 level once again, and I’m sure Tuesday’s open will spark enough fear to push the index above this 30 level. If we get a capitulation selling day on Tuesday, it could mark an attractive buy point.

*Note: Capitulation is a military term that refers to “surrendering or giving up.” In the stock market, capitulation selling is associated with “giving up” in an effort to get out of the market. True capitulation involves extremely high volume and sharp declines — or panic selling. After capitulation selling, there are great bargains to be had. Why? Because everyone who wants to be out of a stock market has sold. True capitulation is the sign of a bottom.

Another Fact: The S&P 500 now trades for just above 13x projected 2008 earnings — one of the lowest P/E ratios in the past decade. When the market hit a low in 2002, for example, the S&P 500 traded at 15x forward earnings. In this same spirit, there are over 50 stocks within the S&P 500 trading below 10x forward earnings, and oil refiner Tesoro (TSO – NYSE) which I mentioned as a possible upside call play last week, is one of them.

Also, nearly every single homebuilder stock is now trading below book value. Lennar and Pulte Homes, for example, are trading at 50% of book value. There is definite value there for anyone willing to ride out the bearishness, and that’s why I plan to add to our special report play from August 2^nd, the DHI January 2010 10 Calls (YRI AB).

As of last Friday’s close, only 11% of the S&P 500 components are trading above their 50-day moving averages. If you recall, this was the trading trigger that I used to play RIG and APA, and they quickly dropped below these critical levels. It’s clear that everyone is selling everything without hesitation. For example, nine different insiders at Monsanto (MON – NYSE) sold over $27 million in stock last week. It’s an ugly market, and his often leads to bad decision-making. But for opportunistic options traders like us, we stand ready to capitalize on any inefficiencies that the market hands us.

Now I admit — this alert contains a lot of statistics. But I feel that it’s critical to be overly informed in times like this. That way, we can keep a level head and make sound decisions going forward. So for now, the plan is to sit back and observe how the markets open on tomorrow. As of right now, it looks to be a bloodbath, but who knows what’ll happen before Tuesday’s open. Perhaps the Fed will make a surprise announcement? They’ve done it before, and I’m sure they’ll do it again. I’m not counting anything out.

Either way, it’s a good thing that we have a light ledger. We closed out last week hitting winners in BEN, APA, RIG, and EXM, which only leaves us holding the GILD February 50 Calls (GDQ BJ). If you recall, this was a very cheap way to play a surprise market pop. If you want to protect yourself against any market selling pressure, go ahead and re-implement a stop loss at $0.55. But remember, Gilead reports Q4 earnings on Wednesday, with the consensus estimate of $0.40 versus $0.39 one year ago. This could be a trigger that makes this position profitable, so if you’re a more speculative trader, you may consider holding into Wednesday’s announcement.

*SCHEDULING NOTE: I hate to say this, but there is a chance that I may have to report for jury duty tomorrow. I’ve already postponed service on two separate occasions, and the persistent clerk’s office refuses to let me slip through the cracks. Therefore, I have to call tonight at 5:00 to see if I need to report on Tuesday. If I do need to report, I want you to watch the action on Tuesday (keeping all the statistics above in mind). Make no plays. In times like this, the smartest course of action is to sit back and let the market sort itself out. Then come Wednesday, we’ll be in good position to capitalize on the very best opportunities. I’ll keep you informed as to my jury status. And of course, I’ll also be here to guide you every step of the way through this challenging market. Until then…

Lock and load!

Sincerely,