Global Meltdown: Part II

U.S. Markets Will Get Punished

Dear Bottarelli Research Member,

As I reported yesterday, we’re seeing a global sell-off. Some have already called it the “Panic of 2008.” And no wonder. On a worldwide scale, yesterday represented the biggest global losses since the terrorist attacks of September 11^th 2001. And today, with the Dow futures trading down a whopping 535 points, it looks like it’s the United States’ turn to share in the bloodshed.

Now, as it turns out, today happens to be the day that I’ve been called in for jury duty. What timing! But to be honest, the more I think about this, the more it could actually be a blessing in disguise. You see, when the markets are poised for such free-fall, there is an allure to try pegging the bottom – via playing calls. And there is also the allure to ride the downside momentum – via playing puts. In my experience, the best thing to do is avoid both temptations. After all, you can certainly make a quick gainer in one minute – and then you can get stopped out the next minute. When it’s said and done, trying to trade in a market like this is nothing more than a luck proposition, with no better odds than betting $1,000 on the flip of a coin. The best advice I can give sit it out – let the dust settle – and attack from there.

Having said that, there are still some speculators reading this bulletin that’ll want to use the incredible volatility to “snipe” a series of 20% winners. And to be honest, I can’t blame you. After all, trading is in my blood, so I certainly understand the desire to trade volatility like we’re going to see at the open. So if you must trade, be sure to play it light and tight (trading only 25% of your standard trade allocation) and be sure to lock in quick gains the instant that they hit.

Now I admit, with futures so far in the red, you can throw a dart at a board and anything you hit will open lower. But two names that look particularly appealing for violent downside action are X and MOS. As I noted last week, United States Steel (X – NYSE) is a stock that could easily lose $15.00 very fast. The head and shoulders pattern that’s now in place could spark a large downside reaction, which should allow you to pick off some nice 20% gainers. Specifically, the X February 100 Puts (X NT) look like an attractive trading vehicle.

Along those same lines, 2007 high-flyer Mosaic (MOS – NYSE) is another stock that’s within a small percentage of companies trading above their 50-day moving averages. It won’t be trading above these levels for long.If MOS follows suite and moves below its 50-day moving average (possibly getting as low as its 200-day moving average) then the stock could shed another $30.00. Specifically, the MOS February 75 Puts (MOS NO) look like an attractive trading vehicle, but be sure to lock in your quick 20% gainers as well.

Another word of caution: When I see a market poised to gap down so violently, I can’t help but think back to August 16^th, 2007. Do you remember what happened that day? As a quick refresher, the Dow had fallen from a high of 14,015 on July 19^th to a low of 12,861 on August 15^th. It was a loss of nearly 9% in less than one month. Many thought that the selling pressure was over, but nevertheless, the Dow traded another 326 points lower the very next morning. It was panic selling at its best. But as the morning turned into afternoon, things started to change. A 300-point loss was trimmed to a 200-point loss. Then a 100-point loss. And by the close of trading, the floor erupted in applause as the Dow closed at 12,845, a mere 14 points below the 12,859 level where it had opened.

Could we see a similar reaction in today’s session? It’s very possible. As a result, if I were playing this action, I would only trade puts in the morning hours – and then I’d break for an early lunch. Then, as the afternoon sets in, any strength (perhaps sparked by programmed buying) could see any losses get absorbed. And then, you’d possibly be left with an early morning sell-off and a mid-afternoon recovery – making for one of the largest daily intra-price price swings in recent memory. Is this scenario unlikely? Yes. But could it happen? Absolutely! (especially if the Fed steps in and makes an intra-day move). As I write this alert, in fact, Treasury Secretary Hank Paulson is stepping up to the podium to address the market situation.

That’s why I listed the four quotes from above. I thought that each of them, in their own way, put today’s market situation into perspective. I liked Thomas Jefferson’s note about banking establishments, for example, since they’re the ones largely responsible for getting us into this mess to begin with. So while I leave you today for jury duty, I really hope to be back tomorrow. But in the meantime, sit tight and let the markets sort themselves out. Like Warren Buffett said above, “we like pessimism but because we like the prices it produces.” In other words, what we’re seeing right now will open up remarkable opportunities, and we’ll be standing ready to take advantage of every one of them. Apple Computer (AAPL – NASDAQ) is down $12.00 as I write. There will be a bounce point coming soon — but we’ll only make a new play when the timing is right. Today is clearly not the time to out-smart the markets.

So in many ways, the timing of my jury selection couldn’t have been any better.

I’ll be back in touch as soon as possible. And until then…

Lock and load!

Sincerely,