Bear Market Thoughts

Plus: Close August Positions

By Bryan Bottarelli
Tuesday, July 08, 2008 2:31 PM EDT
Tue, 8 Jul 2008 18:31:00 GMT

Dear Bottarelli Research Member,

I’d like to take a quick moment and share some of my thoughts on the current “recession” and “bear market,” and the effects each of them will have on the markets going forward.

First of all, I do not feel that any logical comparisons between today’s market and the bear market of 2001. After all, the 2001 market crash was fueled primarily by two sector groups: Internet and Human Genome. In each case, the Internet and Human Genome business models relied on hopes and promises that eventually went unfulfilled. For example, it did not matter how many clicks you received on your website. If nobody was buying, click-counts meant nothing. The same went for the Human Genome. Who cares how many gene-sequences a company had in their database? If these complex DNA sequences did not equate into drugs that cured diseases, the data meant noting. The moment Wall Street realized this, stock valuations crashed — and the carry-over effect took the entire market with it.

Now, in terms of today’s current “bear market,” I think we have a dramatically different situation. After all, the drivers of our current market are companies that are indeed making money off demand-driven markets. In other words, global demand is what is driving price increases — not the hopes and promises about future technological breakthroughs. This is a vast difference.

Plus, sectors like steel, coal, fertilizer, oil, energy, and other commodities are all tangible assets. In other words, their value cannot go to zero in a matter of months (like we witnessed during the busting of the dot.com bubble). Even housing, in my view, offers an element of safety unlike that we witnessed during the 2001 market crash. Sure housing prices are falling, but nevertheless, a piece of real estate (and the structure that sits on top of it) still has inherent value. And this will be a critical aspect of providing a true floor to the market’s recent selling pressure.

Now don’t get me wrong. We will probably witness further market downside in the coming weeks (perhaps even months). And remember, in a bear market, every stock looks awful. Even the very best companies take a beating — and there’s really no sense fighting it. But the silver lining, in my view, is that we’ll also witness a faster recovery. After all, there will come a point where stocks that have aggressively sold off (like the top steel and coal names) will become very, very attractive. And when this occurs, buyers will step in and the recovery process will begin. But until we reach this point, we must remain cautions and biased to the downside.

Therefore, we have no choice but to close out our two August call positions in the BTU August 90 Calls (BTU HR) and the ACH August 30 Calls (ACH HF). In each case, I said that I would continue following both positions after briefly hitting our stop loss and then bounced back. But now that each position has once again dipped below our stop prices, we have no choice but to call each position closed.

This close out leaves us only holding the GENZ August 75 Calls (GAA HO), which are looking good in today’s action. So maintain this position for more upside — and I’ll continue to monitor the difficult market conditions in the very best way that I can. If that means playing more DUG or VIX calls, then we’ll certainly do that. Or if that means playing more puts on former high flyers (like today’s nice profit playing APA puts), we’ll do that as well. As always, the moment a new trading opportunity arises, you’ll be the first to know. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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